What are flatcoins and are they a better protection against inflation?

What are flatcoins and are they a better protection against inflation?

When inflation rates rise to the moon, so-called “flatcoins” come along for the ride.

Flatcoins are a new category of stablecoins that are pegged to the cost of living rather than real assets like fiat currencies. Blockchain development house Laguna Labs is launching one of the first digital assets in this new category. If successful, their Flatcoin could represent a legitimate inflation hedge cryptocurrency as global inflation numbers remain high.

Your NUON flatcoin is pegged to the value of $1 on July 1, 2022. Once a day, the value of Flatcoin is recalibrated to take US dollar inflation into account. A NUON - worth $1 four months ago - was valued at $2.04 on Monday.

To create the daily inflation adjustment, Laguna Labs developed the Truffleing Algorithm that tracks price movements across tens of millions of items and produces a daily inflation estimate that is largely consistent with Fed estimates.

With inflation at multi-decade highs, dollar-pegged stablecoins like Circle's USDC and Tether's USDT are losing value relative to the cost of goods over time. A flatcoin like NUON retains its value during times of inflation. Coinbase CEO Brian Armstrong and co-founder of Ethereum Vitalik Buterin have both advocated for cryptos tied to the cost of goods rather than fiat currencies.

Like most major stablecoins, NUON is intentionally overcollateralized – and will automatically liquidate user loans if the value of their collateral falls below a certain level. The hurdle that Laguna Labs faces is maintaining an ever-increasing level of retention, like US inflation has taken place every year since 1954.

NUON’s algorithm tinkers with the coin’s collateralization ratio so that traders will keep NUON on its course. The collapsed Terra stablecoin used a similar system, although the coin was not fully collateralized. As long as investors are willing to mint and burn NUON, the value of flatcoins should remain roughly the same - despite inflation.

Stefan Rust, CEO of NUON developer Laguna Labs, said he doesn't see NUON competing with companies like Circle or Tether, but hopes the flatcoin can join Bitcoin as investors' inflation hedge.

“Bitcoin is an amazing hedge against inflation, but it has a certain level of volatility,” Rust said. “We are trying to combine the best of both worlds by taking the user experience from the stablecoin market and the inflation hedge from Bitcoin.”

A TradFi analog for Flatcoins is Inflation-linked bonds which adjust interest rates to inflation and growth in popularity after the Great Recession. Like inflation-linked bonds, flatcoins will become a less desirable asset as inflation cools.

“When there is deflation, you are underwater, if you will, but your purchasing power always remains the same,” Rust said.

NUON is now running on a testnet with the intention of going live in the first quarter of 2023. The Flatcoin will go live on decentralized crypto exchanges before applying for approval for listing on centralized exchanges.

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The article What are flatcoins and are they better protection against inflation? is not financial advice.