Who hasn't heard about stablecoins now? They conquered the crypto market due to their reliability. However, a stablecoin is considered “stable” only in relation to a specific fiat currency or a exchange-traded commodities, and it does not take into account what happens to the anchor asset. This means that at a time of inflation or financial crisis it won’t save your money, since the fiat itself depreciates.
That’s why the concept of flatcoin was created. Its goal is to maintain the asset's value no matter what. Such coins may not be tied to fiat at all or take into account the factors of its depreciation. In this article we’ll find out how flatcoins work.
What are flatcoins?
Flatcoins are digital assets aimed at protecting savings from both a volatile crypto market and the instability of the traditional financial system. The concept of their work is very similar to stablecoins. For example, if you have 100 USDT and Tether successfully saves the peg, then even in case of a financial crisis in the US, you will be able to exchange your 100 USDT for 100 USD. Almost the same can be said about flatcoins but it considers a “stable” element not the value of fiat assets, but their purchasing power.
The main criterion for pricing is the "cost of living", which is influenced by the price index, inflation and other economic factors. Imagine a flatcoin X that is pegged to the US dollar but also includes the consumer price index in the price. If prices rise by 10%, then such an asset will no longer cost $1, but $1.2, which should compensate for the depreciation of the fiat currency and preserve the purchasing power of investors.
Pros and cons of flatcoins
Like any other asset class, flatcoins have their strengths and weaknesses. The main advantages of flatcoins are:
- Low Volatility. These coins are less volatile than most other assets on the market. Unlike stablecoins, flatcoins can still change in price under the influence of different factors such as changes in inflation, price index, etc., but they cannot be influenced by whales or speculators.
- Decentralization. It helps to protect assets in extreme situations, like financial crisis: the inflation rate in such case is higher than the profit from securities or deposit rates, and banks often freeze deposits and payments.
- DeFi integration. Usually flatcoins are issued as ERC-20 tokens, which means they are compatible with the Ethereum DeFi ecosystem and L2 solutions.
When using flatcoins, it is also important to consider their disadvantages, which can potentially lead to finantial losses:
- Cryptocurrency collateral. Most often flatcoin will be backed by a cryptocurrency or a group of various coins and tokens. Cryptocurrency support allows you to maintain decentralization, but increases the risk of depegging in the event of a market fall.
- Algorithmic price management. The main problem of implementing the concept of flatcoins is the same as with algorithmic stablecoins – the creation of a reliable and efficient mechanism for maintaining a stable value. As the experience of UST has shown, even if the algorithm works successfully under normal conditions, it may not be able to cope with bank run, for instance.
- Hackers. Each flatcoin is a separate platform with a large number of smart contracts and algorithms in which there may be vulnerabilities and errors. Before using a flatcoin, it is important to review the security audits that the project has passed. Although this does not guarantee a 100% protection against hacking.
Examples of Flatcoins
Flatcoins are a separate class of digital assets, the main purpose of which is to preserve the value and purchasing power of investors no matter what. Examples of flatcoins concept are:
- ReflexerFinance. This project has created RAI flatcoin. It works on the concept of reflexed-index, and uses the buyback price and automatic buyback rate management to match the market and face value of the RAI flatcoin.
- Coinbase. At the end of March, the Base network, launched by the Coinbase cryptocurrency exchange, published an article with proposals for builders. One of the priorities is the development of a dollar-pegged flatcoin.
- Nuon. This flatcoin has only been on the market for a few weeks. The value of the $NUON flatcoin depends on commodity prices and changes with the inflation index. To hold the price, it is pegged to the value of unbiased inflation, protecting purchasing power.
Flatcoins seek to maintain a stable value, but without being tied to any fiat currency. Taking into account a volatile crypto market and an unstable economic system, the flatcoin concept might be a new black this season.
If you want to learn more interesting facts about crypto then don’t forget to check out our blog! You might like our articles “Top 5 NFT Trends in 2023” and “Stablecoin War”.
