- Flatcoins are Pegged Coins, Which Are Not New
- How Flatcoins Theoretically Solve the US Dollar Dependency Issue
- How Flatcoins Do Not Solve The Net Asset Value Issue
- Interest in Flatcoins Exists, but Caveat Emptor
The wild ride that comes with cryptocurrencies is far from over.
Bitcoin and Ethereum systems chug along, as volatile as they have always been.
A series of collapses in exchanges and some coin types are also in the not-too-distant past.
FTX, in particular, stands out, with a pair of coins failing because of the shenanigans of FTX interacting with FTT. Their founder and former CEO, Sam Bankman-Fried, plus his inner circle, face a litany of charges that'll splay across headlines for years to come.
Yet cryptocurrencies are evolving in intriguing ways. The underpinning technology and systems shouldn't be dismissed. The baby doesn't need to be tossed out with the bathwater. To lump them together is reductive.
One of the newest emerging concepts in the cryptocurrency sphere is flatcoins.
How they will be built matters. Why they should exist and the function they support do as well.
Let's look at this new concept and what it has to offer.
Flatcoins are Pegged Coins, Which Are Not New
This concept may seem familiar. It should.
Flatcoins are a form of stablecoins that have been around for many years and have some well-documented flaws.
Stablecoins, as they've existed up until today, are backed almost exclusively by fiat currency. Over 90%, as of the start of 2023, have values pegged to fiat currencies.
Of that total, 99% of the value is backed by the US dollar.
This is a fundamental problem with the entire concept. Why should a blockchain system be so dependent on one fiat currency?
It simply adds one more step to all transactions. One more buy-in, one more sale, and a middleman system – which may or may not have fees and delays – complicating everything involved.
They are derivative products or investments aiming to mirror other assets, and such extreme dependency guarantees they have little to offer outside of moving funds in crypto exchanges without withdrawing funds entirely.
Instead, flatcoins aim to use much broader measures to peg their value. In particular, they aim to replicate some of the ways fiat currencies are valued themselves.
How Flatcoins Theoretically Solve the US Dollar Dependency Issue
Each fiat currency has its own inflation rate based on many factors. Prices of goods, energy, food, rent or mortgages, vehicles and their repairs, healthcare, etc. They all add up to a headline number.
The most notable of which is CPI-U in the USA. It's the estimate of the consumer price index for urban areas. It is far from exact, but it's about the best we've got to work with for a majority of the population.
This is an advantage of indexing – using a broad measure of as many of the most relevant data sources as possible – to get an idea of what's going on with inflation.
Is it perfect? Certainly not. Elderly folks are being crushed since they tend to pay more for healthcare. Renters and new homebuyers are facing their own brutal cost increases.
Yet indexing in this fashion still keeps everything pegged to the US dollar. It clarifies real inflation for real people when they need to transfer money, but only in one fiat currency.
Stablecoins to date have, as noted above, been pegged to fiat currencies – especially the US dollar. They are derivatives skewed by additional market forces. The dollar moves up and down versus the Euro, Yen, Rupee, etc.
Flatcoins aim to do the same kind of indexing that inflation measurements do while cutting out fiat currencies, in essence.
By skipping past the relative values of fiat currencies and tapping into price changes across a broad swath of prices for materials, sources, and goods, they delve deeper into the origin of inflation.
How Flatcoins Do Not Solve The Net Asset Value Issue
So far, so good. Flatcoins cut out one layer of uncertainty and manipulation and aim to replicate a universal inflationary effect.
If only it were so easy to cut out fiat currencies entirely. Flatcoins will, without massive fiat currency reserves, mirror the kinds of market forces exchange-traded funds (ETFs), exchange-traded notes (ETNs), and mutual funds face.
We're talking about net asset value (NAV). In simpler terms, will investor demand match the value that inflation makes flatcoins worth in theory?
Let's look at how (NAV) works on a fundamental level. A mutual fund, ETF, or ETN, listed in the USA has to look at what it is indexed to and how much is invested in it at the end of the day to make a calculation.
NAV = (Assets – liabilities) / Total shares outstanding
Assets are what investors have put into the fund, plus any increase in value for any assets they hold, like shares, bonds, or options contracts. Liabilities are what investors have pulled out, plus any loss in equity.
This results in a price that may not match what the fund aims to mimic. For flatcoins, matching the inflation rate means they must have enough assets through the appreciation of holdings and new investments to match any depreciation as investors withdraw money or holdings lose value.
This creates a problem. With inflation outpacing almost all investment types, how does a flatcoin mimic the index it tries to match without a constant inflow of new money?
That is one aspect of flatcoins that has not been solved. It is one thing to say a flatcoin will match inflation. It is a far different thing to have units outstanding match up.
Let's use a simple real-world example, 10% inflation over a year, starting at $1 million, backing up the flatcoin. If the flatcoin were to match inflation, it would need to add another $100,000 of asset value over that year, everything else equal. Otherwise, the NAV drops to 90%.
This can be easily solved if the flatcoin pulls in another $100,000 worth of investment or asset appreciation. Then it is balanced on paper.
Where does this come from? Either a constant increase in new investment or owning assets that lock up liquidity and appreciate in value in a way that meets or exceeds 10%. Both are risky and out of anyone's control.
It becomes a value trap at best and a “greater fool” investment pitch at worst.
One reminiscent of both the terraUSD collapse last year and the pullout of deposits from banks, as we saw in Silicon Valley Bank and Signature Bank, leading to the failure of both.
Interest in Flatcoins Exists, but Caveat Emptor
On March 23, 2023, Conbase announced in a blog post that it wants to encourage cryptocurrency developers to work on flatcoins linked to inflation.
“We are fascinated by the deep thought we're seeing in decentralized stablecoin design and are particularly interested in ‘flatcoins' – stablecoins that track the rate of inflation, enabling users to have stability in purchasing power while also having resiliency from the economic uncertainty caused by the legacy financial system. We also welcome other forms of ‘flatcoins' that do not peg to fiat but rather fill the space between fiat pegged coins and volatile crypto assets. With the recent challenges in our global banking system, we believe these explorations are more important than ever.
“We're excited to hear from teams that are exploring their own system of stablecoin(s)/ flatcoin(s), or focusing on ways to increase adoption of already existing systems…”
Encouragement is not a path forward, but a sign of acceptance from one of the largest crypto exchanges is some encouragement.
Ray Dalio, founder of Bridgewater Associates and a mixed critic of crypto to date, has previously seemed receptive to flatcoins as an alternative to bonds. As he said on CNBC's Squawkbox:
“I think that what would really be best is an inflation-linked coin. The closest thing to that is an inflation index bond, but if you created a coin that says OK this is buying power that I know I can save in and put my money in over a period of time and transact in anywhere, I think that would be a good coin.
Yet the fundamental problem – underlying funds to encourage investment in flatcoins and a system to make it sustainable without ever-increasing investment – has yet to materialize.
Flatcoins, on paper, seem like a fantastic alternative to US dollar-denominated investments. They could cut out problematic intermediaries while pricing themselves across fiat currencies in a way investors cannot access today.
Yet they remain a hypothetical solution. One with no system behind them that makes them robust and sustainable.
Flatcoins are an intriguing concept that warrants watching, but the bridge from concept to reality remains painfully undefined, especially when it comes to backing it with real assets.
Take Care,
Adam English
The Profit Sector
