Original Title: "Overview of the Anti-Inflation Stablecoin (Flatcoin) Race: Why is it Considered a Top 3 Cryptocurrency Trend by Vitalik in 2023?"

Original Author: Leo Deng, LK Venture

TL;DR

The Rise of Anti-Inflation Stablecoins: Digital stablecoins pegged to fiat currencies are affected by purchasing power decline, leading to a strong interest in the financial market for an "anti-inflation stablecoin" (Flatcoin) that can truly maintain purchasing power stability in an inflationary environment. This new type of stablecoin resists inflation by being pegged to the price of a specific basket of goods and is considered an important direction for the future of finance by industry leaders such as Vitalik Buterin and Brian Armstrong, CEO of Coinbase.

The definition of anti-inflation stablecoin: Unlike other stablecoins that are pegged to specific assets or fiat currencies, anti-inflation stablecoins are designed to combat inflation and maintain purchasing power. In countries where inflation rates are soaring, it provides an effective tool to fight against inflation and is used as a hedging strategy in high inflation areas such as Latin America, Africa, and other countries.

The design challenges of anti-inflation stablecoins: accurate measurement of inflation rates is a problem due to differences in measurement methods such as CPI and PPI in different countries and regions; reliable and accurate data sources need to be relied upon, and data verification and auditing need to be ensured; high system stability and security are required to combat manipulation, attacks, and market fluctuations; legal and regulatory restrictions and risks may be brought about by stablecoin design and issuance due to differences in countries; effective economic models need to be designed to ensure that stablecoins truly reflect inflation; technically, real-time processing of inflation data, stable smart contract design, and system efficiency need to be ensured; market acceptance and user education are also key to success.

The significance of anti-inflation stablecoins in the cryptocurrency market: protecting purchasing power for users in high inflation environments, providing stability, and being more reliable than traditional stablecoins; promoting technological innovation, improving the practicality of digital currencies, attracting more traditional financial participants, and helping to form a clear regulatory environment. At the same time, it brings diversified choices to the market and provides new risk management tools for the global economy.

Typical project analysis: including Frax Price Index (FPI), CPI-U linked stablecoin of Frax Finance, and fully collateralized encryption mortgage; Reserve project, aiming to create a decentralized stablecoin Reserve Token (RSV), reducing risk through diversification; SPOT, based on Ampleforth and Buttonwood, bridging the gap between speculative cryptocurrencies and USD alternatives, providing stability through zero-clearing layers, and can operate on multiple chains.

Why do we need an anti-inflation stablecoin (Flatcoin)?

As a reflection of economic and national power, currency has undergone many changes throughout history. Whenever a dominant power gradually declines and is replaced by a rising power, the dominant currency status also changes accordingly.

The Dutch guilder dominated during its economic peak, while the British pound during the British Empire era became a globally trusted currency. However, these currencies were unable to maintain their leading positions permanently.

Recently, Ray Dalio, the founder of Bridgewater Associates, suggested that the status of the US dollar as the world's reserve currency may be challenged. In an interview in 2023, he emphasized that as the influence of the US dollar diminishes globally and the international economic and monetary landscape becomes more multipolar, the reserve currency status of the US dollar faces uncertainty in the future.

Since January 2020, the average purchasing power of Americans has decreased by 23.90%.

(Data from: https://truflation.com/)

From October 10, 2020 to October 10, 2023, Truflation's data shows that the average purchasing power of Americans has decreased by 20.39%. This actually means that for someone who holds only USD assets, their ability to purchase goods in the market has shrunk by one-fifth during these three years.

However, such inflationary phenomena are not unique to the United States. According to data from the International Monetary Fund (IMF), the global inflation rate is expected to be 6.6% in 2023, while the figure for 2022 is 8.8%. The World Economic Forum further pointed out that due to the complex factors of globalization, climate change, wage-price spirals, and highly liquid global markets, the global economy is facing a sustained period of high inflation.

Some countries, such as Argentina, Turkey, and Iran, have shown extremely high inflation rates of 76.1%, 51.2%, and 40.0% respectively in 2023 due to political instability, international sanctions, currency policy mistakes, and economic management issues.

In the field of cryptocurrency, although traditional stablecoins are designed to be pegged to specific fiat currencies or assets to maintain their stability, they have also been affected by fiat currency inflation. From the first batch of stablecoins born in 2014 to the widespread attention they received in 2017 with the rise of decentralized finance (DeFi), Tether (USDT) and USD Coin (USDC) have become the third and fourth largest cryptocurrencies in the world, respectively. Currently, there are about 200 stablecoins on the market with a total market value of $190 billion.

However, these stablecoins such as USDT and USDC are primarily operated in a centralized manner, carrying the risk of being controlled by a central entity and potentially exposing holders to counterparty and regulatory risks.

More importantly, as global inflation continues to rise, the true value of these stablecoins pegged to currencies such as the US dollar is being eroded.

Relative purchasing power index of the US dollar compared to the initial issuance period.

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From this perspective, stablecoins are not necessarily truly "stable", which seems unreasonable but is a real dilemma. With the rise of inflation rates and the uncertainty of the global economy, the financial market, especially the cryptocurrency market, is seeking a new type of stablecoin that can maintain purchasing power stability, even in an inflationary environment. The anti-inflation stablecoin (also known as Flatcoin) has emerged as a new focus in the market.

Flatcoin, as a decentralized stablecoin, emerged to protect assets from the impact of inflation. Unlike traditional stablecoins, Flatcoin resists inflation by maintaining a peg to the price of a specific basket of goods, thus protecting purchasing power. Since the concept of Flatcoin was proposed, it has attracted high attention from the cryptocurrency industry. The clear goal of Flatcoin is to "maintain stable purchasing power while also having some flexibility to resist economic uncertainty caused by the traditional financial system."

At the end of 2022, Vitalik Buterin, co-founder of Ethereum, shared his outlook on the cryptocurrency industry in 2023 during an interview with Bankless. He mentioned three "huge" opportunities that have yet to be realized in the cryptocurrency field: mass wallet adoption, inflation-resistant stablecoins, and Ethereum-powered website logins.

Vitalik believes that creating a stablecoin that can withstand various conditions, including the US dollar's hyperinflation, would provide a huge opportunity for the entire cryptocurrency industry. He emphasized that providing a reliable, inflation-resistant stablecoin for billions of users would be an important supplement to the traditional financial system.

The CEO of Coinbase, Brian Armstrong, has also mentioned Flatcoin multiple times in public interviews and discussed this new technology on Twitter, listing it as the top of 10 cryptographic technologies.

Brian believes that Flatcoin is the future direction of stablecoin evolution. Unlike traditional stablecoins that are pegged to fiat currencies, Flatcoin provides a new and more stable way of storing value by tracking inflation. He also emphasized that although Coinbase is not currently developing in this area, they have shown strong interest in the potential of this new type of stablecoin.

In terms of design and implementation, anti-inflation stablecoins may require more complex economic models and algorithms to accurately reflect changes in inflation and adjust the value of stablecoins accordingly. At the same time, anti-inflation stablecoins may also face more complex regulatory challenges, particularly regulatory requirements related to the accuracy and fairness of inflation data.

Design Challenges of Inflation-Resistant Stablecoins

The design of anti-inflation stablecoins is a technically and economically challenging task, with the goal of maintaining the purchasing power of stablecoins in an inflationary environment. However, there are still many challenges in designing mechanisms for anti-inflation stablecoins.

1. Accurate measurement of inflation rate:

The inflation rate is one of the key factors that affects the design of anti-inflation stablecoins. The inflation rate may vary from country to country and region to region, so designers need to find an accurate and reliable way to measure inflation. Inflation can be measured in various ways, such as the Consumer Price Index (CPI), Producer Price Index (PPI), or other inflation indicators. However, these indicators may be influenced by various factors, including political factors, economic policies, and different statistical methods, which can affect the accuracy and effectiveness of anti-inflation stablecoins.

For example, in an application case of Volt Protocol, its corresponding local stablecoin VOLT maintains stability by anchoring it to the Consumer Price Index (CPI). If the inflation rate remains at 7% for a year, the token will be anchored at $1.07.

2. Data source reliability:

The design of inflation-resistant stablecoins relies on reliable and accurate data sources. If the data source is inaccurate or unreliable, it may cause the value of stablecoins to deviate from the actual inflation rate, thus losing its inflation-resistant characteristics. Designers need to find reliable data providers and ensure the accuracy and timeliness of the data. In addition, a robust data validation and auditing mechanism needs to be established to ensure the authenticity and integrity of the data.

3. System Stability and Security:

Any cryptocurrency project, especially stablecoin projects, needs to consider the stability and security of the system. The design of anti-inflation stablecoins needs to consider how to prevent manipulation, attacks, and other factors that may affect the stability and security of the system. In addition, it is necessary to consider how to design robust protocols and mechanisms to cope with market fluctuations and unforeseen events, ensuring the continuous stable operation of the system.

For example, on May 10, 2022, the price of the algorithmic stablecoin TerraUSD, which runs on the Terra blockchain, fell and lost its peg to the US dollar. This case demonstrates how algorithmic stablecoins can be easily affected by speculative attacks when the system lacks collateral.

4. Legal and Regulatory Challenges:

Anti-inflation stablecoins may be affected by the legal and regulatory environment of different countries and regions. These laws and regulations may affect the design, issuance, and trading of anti-inflation stablecoins. Some countries may restrict or prohibit the use of anti-inflation stablecoins, or require project parties to comply with specific regulatory requirements. These legal and regulatory challenges may increase the complexity and risk of the project.

At the end of 2019, when stablecoins were just beginning to emerge, the G7 summit strongly declared them a serious risk for international settlements. This demonstrates the impact of legal and regulatory environments on the design and application of stablecoins. In September 2023, the G20 summit approved the Financial Stability Board's recommendations on the regulation, supervision, and oversight of crypto asset activities and markets, as well as global stablecoin arrangements. It is expected that more relevant regulatory requirements will be introduced gradually.

5. Design of Economic Models:

The economic model of anti-inflation stablecoins is the foundation for ensuring their functionality and effectiveness. Designers need to consider how to construct an effective economic model to ensure that the value of stablecoins accurately reflects the inflation rate. This may include determining the issuance mechanism, circulation mechanism, and destruction mechanism of stablecoins, as well as adjusting the value of stablecoins through market mechanisms.

6. Complexity of Technical Implementation:

The technical implementation of anti-inflation stablecoins is a complex process that requires consideration of multiple technologies and algorithms. For example, it involves accurately and real-time obtaining and processing inflation data, designing smart contracts for stablecoins to ensure their anti-inflation properties, and ensuring the scalability and efficiency of the system. Additionally, it is necessary to consider how to integrate with existing blockchain networks and other cryptocurrency projects to achieve widespread adoption of anti-inflation stablecoins.

7. Market acceptance and user education:

Market acceptance and user education are also key factors for the success of inflation-resistant stablecoins. Designers and project teams need to consider how to educate users on the advantages and usage of inflation-resistant stablecoins, as well as how to promote them to gain wider market acceptance.

The significance of inflation-resistant stablecoins for the cryptocurrency market

Exploring anti-inflation stablecoins has multiple important implications for the cryptocurrency market. They not only provide more options for market participants, but also drive innovation and development in the cryptocurrency industry.

1. Protecting purchasing power. Anti-inflation stablecoins protect users' purchasing power by being pegged to inflation indicators, which is highly attractive for investors and users seeking asset preservation in high inflation environments. They provide a unique value storage and trading tool for the cryptocurrency market.

2. Increase market stability and trust. Traditional stablecoins (such as USDT and USDC) are usually pegged to specific fiat currencies, but in an inflationary environment, their actual value will decrease as the purchasing power of fiat currencies declines. By providing an inflation-resistant stablecoin, market stability and trust can be increased, reducing inflation risks for investors and users.

3. Drive innovation in the cryptocurrency industry. The design and implementation of inflation-resistant stablecoins require solving many technical and economic issues, which can help drive innovation and development in the cryptocurrency industry. By addressing the challenges faced by inflation-resistant stablecoins, new solutions and technologies can be found to help advance the entire industry.

5. Promote the diversification of the cryptocurrency market. Anti-inflation stablecoins provide more choices and diversification for the cryptocurrency market, allowing market participants to choose different stablecoins according to their needs and risk preferences. This diversification can increase the complexity and maturity of the market, encouraging more people to participate in the cryptocurrency market.

Overall, the exploration and development of inflation-resistant stablecoins have significant strategic importance for the cryptocurrency market. They can bring more opportunities to the market, but also pose a series of challenges and issues that require the participation of market participants, developers, and regulatory agencies to jointly explore and solve.

1. Frax Price Index

Frax Price Index (FPI) is one of the stablecoins in the Frax Finance ecosystem. It is the first stablecoin pegged to a basket of tangible consumer goods defined by the US Consumer Price Index (CPI-U). Unlike traditional stablecoins that are priced in national currencies, FPI creates an independent pricing unit fully backed by cryptocurrency collateral, providing consumers with a currency unit that is not tied to any national currency.

Regarding the mechanism for addressing inflation, FPI has the following innovations:

Related to consumer goods: The design purpose of FPI is to anchor its value to the basket of physical consumer goods defined by the average value of the US CPI-U. This linkage is unique because it connects the value of digital assets to tangible consumer goods, aiming to maintain purchasing power and provide price stability unheard of in the volatile crypto market.

2. Reserve Protocol

3. SPOT

SPOT Collateral Rotation Mechanism Diagram

Usability on multiple chains: Due to the full-chain functionality of the SPOT protocol, SPOT is not limited to a single blockchain and can be used and traded on any collaborating chain (such as Ethereum, Polygon (PoS), Arbitrum, Optimism, BNB Chain, and Polygon zkEVM), fully leveraging the unique opportunities on each chain to provide users with more reliable assets.

Conclusion

If there is a type of anti-inflation stablecoin that can maintain its value for centuries without being eroded by inflation, it would be an ideal asset. Imagine if you could earn some funds today and leave them to your descendants, and when they use these funds a hundred years later, they can purchase goods equivalent to what you can currently buy, what a scenario it would be?

However, this is not something that legal tender can achieve, even for strong currencies like the US dollar.

From a long-term perspective, in the field of cryptocurrency, especially in the stablecoin field, the progress of industry innovation is not only to expand existing asset categories, combinations, and mechanisms, but also to create new types of assets that can maintain stability in the short term, be more stable in the long term, and resist inflation. Among them, anti-inflation stablecoins will definitely play a more important role.

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