May 25, 2024

Flatcoins: the Ultimate Inflation Hedge?

flatcoin inflation

In the shadow of rising inflation rates worldwide, a new cryptocurrency solution known as “Flatcoins” is gaining attention as a potential remedy to eroding purchasing power. Will it work?

Flatcoins in a nutshell?

Flatcoins have emerged as a response to the challenge of safeguarding one’s purchasing power amidst a backdrop of rising inflation. Flatcoins are meant to be an inflation hedge, so by way of example, if you buy 1 flatcoin today, its value would rise at the same pace as inflation so your purchasing power not be eroded in real terms (that is, after taking into account the effect of inflation). Sounds great doesn’t it?

The Birth of Flatcoins

The term “Flatcoins” was coined by Balaji S., the former CTO of Coinbase, and Sam Kazemian, the innovator behind the Frax Finance stablecoin protocol. Their vision was to create a stablecoin that could effectively preserve its value relative to inflation; in other words, create the perfect inflation hedge.

Industry push for Flatcoins

Flatcoins are a crypto-driven response to counteract the erosive effects of inflation on purchasing power. Their development is closely monitored by industry leaders, underscoring their potential significance within the cryptocurrency landscape.

Base, an Ethereum rollup supported by Coinbase, views flatcoins as ‘crucial.’ Their ecosystem fund is eager to invest in teams either pioneering flatcoin innovation or focused on boosting the adoption of existing solutions. Meanwhile, Coinbase’s CEO Brian Armstrong has endorsed flatcoins, anticipating a significant market impact for whoever successfully implements the concept.

What are Flatcoins? and how do they operate?

Flatcoins are a unique breed of stablecoins designed to maintain a stable value relative to a specific reference currency, such as the U.S. dollar for instance, while also incorporating mechanisms to account for inflation.

To automate the inflation adjustment process, they employ an on-chain oracle. Oracles are trusted data sources that supply real-world information to smart contracts on the blockchain. Then using data provided by the oracle, the smart contract calculates the necessary adjustments to the stablecoin’s value and adjusts supply accordingly. For instance, Frax Price Index (FPI), adjusts its value based on the U.S. Federal Government’s CPI-U (Consumer Price Index for All Urban Consumers). This monthly adjustment is orchestrated through an on-chain oracle. However, given recent criticisms regarding the calculation methodologies of the U.S. CPI, some protocols, like Nuon, have opted for custom inflation indices. Nuon utilizes the “Truflation” independent inflation index oracle and updates its peg daily.

In my opinion, it’s crucial to recognise that inflation is inherently tied to geography, displaying variations from one country to another. Its magnitude depends on the specific selection of goods (and services) that constitute the inflation basket, along with their corresponding weightings. These elements diverge significantly between countries. If someone possesses the capability to tokenise the value of everyday items such as potatoes, corn, milk, oil, and so on (essentially representing the components of the inflation basket) across various countries, they could potentially offer real-time Consumer Price Index (CPI) data for each particular country. Data derived from such a source could then serve as a solid foundation for the development of a genuine flatcoin stablecoin but until that happens I’m not sure I would put my full trust in a flatcoin stablecoin that is based on archaic datasets, often subject to periodic revisions!

So far, it’s uncertain whether flatcoin stablecoins are a temporary trend or a long-term innovation. I’m closely monitoring this trend because it’s incredibly intriguing and I firmly believe in the potential of blockchain technologies to drive this innovation forward. Be sure to stay tuned for future updates!