- Stablecoins and flatcoins represent two different approaches to creating stability in the volatile cryptocurrency market when compared with Bitcoin and Ethereum.
- Stablecoins reduce volatility but lose to inflation; flatcoins attempt to maintain purchasing power via algorithmic supply adjustments tied to inflation rates.
Introduction
A disruptive new type of cryptocurrency operates on the principle that the world is flat, and if not, it should be. Unlike our esteemed members of the Flat Earth Society, they may actually have a point and have found favor with industry heavyweights like Coinbase founder Brian Armstrong.
A big reason why we have Bitcoin and cryptocurrency is to create an antidote and safe haven asset to combat centralized finance failures such as corruption and monetary inflation.
In the last 2 years, with record inflation and high-interest rates wreaking havoc on normal people’s wallets, it’s clear that our money just isn’t going as far as it used to in the good old pre-Covid days.
Flatcoins are a new breed of digital asset that aims to reinvent the stablecoin model, arguing that there’s no point staying level with the US dollar if you’re losing buying parity each year.
Stablecoins and flatcoins represent two different approaches to creating stability in the volatile cryptocurrency market when compared with Bitcoin and Ethereum.
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Both offer potential benefits but also have tradeoffs for investors to consider.
As digital assets pegged to real-world assets, they aim to provide crypto investors with options that avoid extreme price swings. However, stablecoins and flatcoins achieve stability through different methods, each with unique advantages and disadvantages.
This article provides an overview of stablecoins and flatcoins, compares their key features, and examines the pros and cons of each.
What Are Stablecoins?
Stablecoins are cryptocurrencies that are designed to maintain a stable value relative to a target asset, usually a major fiat currency like the US dollar, Euro, or even commodities such as gold, and came to prominence in the middle of 2014, nearly a decade ago.
While the first stablecoins like BitUSD and Nubits failed, those that succeeded, such as USD Tether and Circle’s USD Coin (USDC) now reap billions in profit each year, causing TradFi giants like PayPal to also enter the sector (see PYUSD)
Stablecoins enable traders to move between cryptocurrencies without exposure to volatility.
They provide easy access points for new crypto investors by bridging the gap between fiat and crypto. Stablecoins are also extensively used for payments, lending and decentralized finance (DeFi) staking and yield farming.
The most common types are:
- Fiat-collateralized: Backed by fiat currency reserves (e.g. USDC, Tether)
- Commodity-collateralized: backed by real-world commodities like gold or silver (e.g. PaxGold)
- Algorithmic: Adjust supply via algorithms to maintain peg (e.g. DAI)
The total market cap of stablecoins currently sits at $125 billion, up from just $5.6 billion in 2020.
Tether is the most popular stablecoin with a market cap of around $80 billion (⅔) while USDC makes up around 20% of the market.
How Do Stablecoins Work?
The most common approach is for stablecoin issuers to back each coin in circulation with reserves of the target currency.
For example, if 1 USDT is always redeemable for $1 USD, then its price should remain around $1.
This means that issuers must maintain their currency reserves with enough legal collateral to stabilize stablecoin prices.
These reserves allow issuers to mint new coins when demand rises and burn coins when it falls, managing supply to meet demand.
Top stablecoins like Tether rely on this model to maintain price stability and enable liquidity for cryptocurrency trading pairs.
However, while stablecoins help to reduce volatility in the short term, their purchasing power erodes over time due to inflation.
Since the US Dollar is not a scarce, fixed-supply asset, this makes these stable cryptos better for trading and payments than a store of long-term value.
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What Are Flatcoins?
A flatcoin is a new type of stablecoin designed to maintain purchasing power against inflation over time.
Instead of pegging against fiat currency like the US Dollar, flatcoins peg their value to inflation rates directly, dynamically adjusting supply as prices change.
This means these coins track purchasing power (how much you get for your buck when buying stuff) rather than mirroring a currency losing value to rising prices.
Flatcoins (the term coined by former Coinbase CTO Balaji Srinivasan) aim to provide the stability of fiat currency pegs while also maintaining long-term purchasing power that fiat-pegged stablecoins lose to inflation over time.
The first flatcoin, Nuon, was launched in 2022 and is now available on chains like Arbitrum.
How Does a Flatcoin Work?
Flatcoins are backed by software-based algorithms, not real-world collateral.
They peg against a broad inflation index, in order to maintain stable purchasing power levels across varying financial situations and countries.
Their real value stays constant regardless of fiat currency fluctuations or inflation rates, something that traditional stablecoins cannot do.
As inflation rises, the supply of flatcoins increases to match the rising prices. This allows 1 flatcoin to theoretically purchase the same basket of goods today as it would years in the future, protecting its purchasing power.
However, a big question to answer is how do you measure inflation reliably? Do you use metrics like the United States’ Consumer Price Index (CPI) and Producer Price Index (PPI) readings, or new-generation trackers like TruFlation?
Comparing Stablecoins And Flatcoins
While stablecoins and flatcoins share the goal of price stability, they achieve it through different mechanisms:
Peg
Stablecoins are simpler assets that directly peg to assets like the US dollar, which makes their stable value easier to understand and assess.
By contrast, flatcoins aim to track and peg to purchasing power through historical data such as inflation reports that might not always be accurate.
Backing
Traditional stablecoins’ fixed peg to fiat currencies means that inflation is eating away the purchasing power.
Conversely, flatcoins’ sophisticated algorithmic architecture and their long-term stability are still unproven and based on the history of algo stablecoins.
It’s unclear if pegging to inflation can work as well in practice as it does in theory.
Use Cases
There’s no question that stablecoins are simply better suited to enable trading and payments given their direct link to fiat currencies.
Flatcoins’ advantages lie in attempting to create a truly global, inflation-resistant store of value. One balances volatility while the other seeks lasting stability.
Sustainability
Both asset types still have unknowns regarding their long-term viability. Stablecoins need to maintain large, audited collateral reserves.
And flatcoins’ stability hinges on algorithms and supply adjustments working perfectly over decades.
The Bottom Line
While stablecoins and flatcoins take different approaches to taming volatility, they share the goal of reducing instability in cryptocurrency prices.
Crypto investors considering these assets should weigh their tradeoffs.
Stablecoins offer simplicity and convenience but lose value to inflation over time. Flatcoins are innovative but not battle-tested as an inflation hedge.
As an unproven algorithmic stablecoin, a curse word after the Terra USD collapse, investors will understandably be nervous.
For those seeking an inflation-resistant store of value, flatcoins offer a promising new alternative if they can deliver on their value proposition long-term.
The dynamic supply adjustments of flatcoins also make them a potential global payment option.
With no need for collateral and the red tape that goes with real-world assets (RWA), flatcoins in theory can achieve stability worldwide through the power of computing.
However, because they take inflation-targeting into their own hands, flatcoins remain an experimental concept.
As both asset classes mature, they may serve complementary roles in the cryptocurrency ecosystem.
Stablecoins act as the main bridge between fiat and crypto, while flatcoins could emerge as a store of value and hedge against inflation.
Source: https://bitcoinworld.co.in/stablecoins-vs-flatcoins-which-one-is-better/