Post-COVID-19 inflation has raised interest in flatcoins, a stablecoin “cousin” aimed to limit inflation risk. Many flatcoins, like Terra’s TerraUSD (UST) stablecoin, are algorithmically supported, and the collapse of LUNA and UST shows the perils of algorithmic backing. Thus, flatcoins are interesting theoretically but problematic in design. Flatcoins will succeed if developers deliver.
Flatcoin white papers, including Coinbase‘s, have yet to fulfill their promises. Some projects’ token economics designs may be riskier than stablecoins. Flatcoin usage cases are important. Inflation and economic instability may mislead people into thinking an asset may help them keep their buying power. Stablecoins are fiat currencies in digital form. Flatcoins, on the other hand, are economic indicator-based gauges of fiat currency buying power.
As long as inflation is over zero, flatcoins will deviate from the fiat currency they monitor. Thus, flatcoins require fiat currencies or their digital versions as means of trade and units of account. Because flatcoins depend on the dominance of fiat currencies and stablecoins as means of trade and units of account, they can never be better. Flatcoins, derivatives of inflation, expose investors to inflation rates. Inflation-risky asset types are old.
Since 1997, Treasury Inflation-Protected Securities (TIPS) have managed fixed-rate bond inflation risks. ETFs in brokerage accounts allow retail investors to invest in TIPS and inflation. ETFs allow institutional and ordinary investors to manage inflation risk conveniently. Flatcoins may be a poor inflation-hedging investment.
Flatcoins might boost the economy despite their detractors. Flatcoins innovate by bringing classic financial instruments to the blockchain. Flatcoins digitize assets like stablecoins digitize fiat money. This invention may improve financial transactions and compete with TIPS ETFs, which may cut financial market expenses. However, flatcoins cannot solve our macroeconomic problems.
Flatcoin applications and developments were previously discussed. However, an inflation-pegged stablecoin is currently under development and faces several hurdles. Some projects are creating CPI-indexed flatcoins using stablecoin techniques. Like algorithmic stablecoins, Frax Price Index Share (FPIS) and Reflexer’s Rai Reflex Index (RAI) algorithmically alter the flatcoin supply to preserve the peg to a purchasing-power-related index.
As Terra’s fall showed, algorithmic stablecoins may spiral downward like a bank run in adverse market conditions. Frax Finance’s white paper on its Frax Price Index (FPI) pegging mechanism states: “During times that AMO yield is under the CPI rate, a TWAMM AMO will sell FPIS tokens for FRAX stablecoins to keep the CR at 100% at all times.” If the CPI index’s return falls below its real value, the protocol will sell index tokens for Frax Finance’s stablecoin. Algorithmic stablecoins are vulnerable to this design. A Terra-like run is likely if the protocol runs out of reserve Frax Price Index Share (FPIS) tokens.
Since inflation seldom falls negative, continual sales of FPIS tokens will be needed to maintain the 100% collateral ratio, making this design more susceptible to runs than other algorithmic stablecoin designs. Using non-algorithmic adjustment requires centralized authority. Trust in stablecoin initiatives that employ fiat money as collateral maintains U.S. dollar escrow. Overcollateralized crypto assets are market-risky. Flatcoin initiatives still require a solution.
Flatcoins’ buying power index is hindered by oracle protocol data accuracy. Flatcoins’ potential would be limited by using just BLS CPI data. Chainlink with IoTeX’s W3bstream might supply real-time data for accurate CPI statistics. Oracle team innovation will determine flatcoin success. If designers can get real-time CPI data, a decentralized flatcoin index might dramatically improve inflation-hedging investment tools.
Flatcoins and other stablecoin-based cryptocurrencies must overcome their fundamental flaws to become popular. The financial ecosystem must be assessed when flatcoins and other inflation-indexed cryptocurrencies arise. Are they an investment instrument or a reliable, decentralized currency alternative?
Investors, consumers, and authorities must carefully review digital asset developments. Understanding these cryptocurrencies’ actual origins and potential will determine whether they will dominate the financial landscape or remain an exciting but niche investment alternative.
Flatcoins illustrate digital asset stability and decentralization. This unique financial tool comes with risks and uncertainties. By monitoring these changes, investors, consumers, and regulators can better manage the future of inflation-indexed cryptocurrencies.
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