November 15, 2022
This article originally appeared on MakeUseOf.
Wait, these cryptocurrencies are flat? What does that even mean? What is a crypto flatcoin?
The cryptocurrency industry is known for being volatile and unpredictable. Assets can change drastically in value in just a few hours, so there are a lot of risks involved in investing. With the introduction of stablecoins, investing can be more of a sure thing, but what about flatcoins? How are these newer cryptocurrencies useful? And what is a flatcoin, anyway?
A flatcoin is a cryptocurrency pegged to the price of living. Flatcoins first arose in 2022, as rising inflation rates continued to hit cryptocurrency values (which we'll discuss in more depth a little later).
Because flatcoins are a new phenomenon at the time of writing, there aren't hordes of them out there today. However, a notable example is Nuon, the first-ever flatcoin. Nuon is still in its testnet phase but seems to have potential. It is expected to go live in the first quarter of 2023.
So, what's Nuon all about?
Nuon is a flatcoin that relies on something known as a blockchain oracle to work. Blockchain oracles like Chainlink have been around for some time and are important for other blockchains. Using an oracle, a blockchain can receive external data (something that blockchains cannot do on their own). In this case, Nuon needs data on inflation rates and purchasing power, which it receives via an independent inflation index oracle.
To use Nuon, you need to deposit collateral because Nuon needs to remain over-collateralized to maintain its peg. Users can deposit various cryptocurrencies as collateral, including Ethereum, Bitcoin, Avalanche, and the stablecoins Tether and USDCoin. Now, this is technically a loan, but you don't have to pay any interest on the Nuon you take out using your collateral. Once you deposit your collateral, Nuon can be minted for personal use.
Nuon is also decentralized, meaning its protocol is controlled by its community via a governance process. Nuon has already announced its governance token, nuMINT, which users can buy and then stake to harbor voting power.
Nuon created something called the Truflation algorithm to adjust its price to current inflation rates. This algorithm monitors the price changes in over ten million products to create a solid base on which inflation rates can be calculated.
Furthermore, Nuon is currently designed to be pegged to the value of what $1 was on July 1, 2022. This is the value point that all future Nuon pricing will be measured against and is recalculated daily. At times, inflation rates may teeter off, so it's not a given that Nuon will constantly be increasing in price.
Nuon is currently in testnet, but if it performs well in 2023, many exchanges will likely adopt it for trade. Time will tell on this one.
But are flatcoins necessary? What niche do they fill?
When you hear of a crypto being pegged to another asset, you may think of stablecoins.
There are many types of stablecoins out there today, but a good deal are pegged to national currencies, like the US dollar, or precious resources like gold or silver. While this can mitigate big price fluctuations and provide investors with more certainty, the problem of inflation is still very much present.
Inflation is a process in which currencies lose purchasing power as the cost of things increases. To better understand this phenomenon, let's consider house prices.
In 1980, according to Hudser, the average house price in the US was about $64,600. To our 21st-century eyes, that figure may seem extremely low. But this was not the case at the time, as the relative cost of living was equal to the period (but much lower than the current period). The cost of living applies to various factors, such as groceries, electricity or gas bills, rent, mortgages, and fuel. In 1980, all these were considerably cheaper, meaning each US dollar had more purchasing power (i.e., you could get more per dollar than you can now).
Each dollar, pound, euro, rupee, or any other kind of fiat currency tends to lose purchasing power as time passes. Various causes have been attributed to inflation, such as an excess money supply (money printing by governments), historically low-interest rates, excessive corporate profits, or a surge in product demand (or pressures on production). Regardless of the cause, inflation is bad news for society. After all, nobody wants to pay more for the things they need.
In terms of cryptocurrency, inflation also has negative effects. When the purchasing power of fiat currencies decreases, cryptocurrencies usually follow, as their value is still somewhat tied to traditional currencies. For example, if someone was to sell 5 BTC, it's likely that these profits would eventually be converted to a kind of traditional currency. Of course, an investor can take their BTC funds and purchase another cryptocurrency, but the endgame is often to acquire spendable assets.
Bitcoin can be spent in numerous establishments today, but on the whole, it's still largely unaccepted by global retailers and services. The same goes for all altcoins. So, there's still a need for traditional currency. This means that cryptocurrency values are inherently linked to fiat currency value. For example, if the dollar value decreases, Ether's value will decrease when converted to USD (GBP, EUR, or otherwise).
While some cryptocurrencies can somewhat hedge against inflation if they have a limited supply, they are still dangerously exposed to big price fluctuations. For example, Bitcoin's finite limit of 21 million BTC prevents excess supply but still hasn't been adopted worldwide and is largely unregulated. So, by nature, Bitcoin is not stable in value. In the past, Bitcoin has seen its value double or halve in months, so it's hard to rely on such an asset to mitigate the effects of inflation.
But with a flatcoin, inflation doesn't seem to be much of an issue. This is because a flatcoin's price is pegged to the price of living, making them both volatility- and inflation-resistant.
The idea behind flatcoins is to maintain a constant value, even in the face of inflation. For example, say the price of apples is increasing over time (which it most certainly is). If an apple today is $1 each, chances are they'll be worth more five years from now. If you're using Nuon, this shouldn't be a problem because flatcoins are pegged to the price of living (which includes groceries). So, theoretically, the apple will always be worth one Nuon. Two apples will be worth two Nuon, and so on.
There's no denying that the cost of living will continue to increase. But flatcoins are designed to be directly linked to purchasing power. Having a cryptocurrency that isn't linked to fiat prices could be revolutionary. If flatcoins can truly hedge inflation, they could prove invaluable over time by allowing users to maintain the value of their money.
With inflation continuing to stress our financial responsibilities, it's clear that we need something to help hedge against the rising cost of living. And flatcoins may be able to help us here. But it's early days for the flatcoin industry, so there's no knowing if this kind of cryptocurrency will prove useful in the future or if it will crash and burn. At the moment, all we can do is speculate.
This article originally appeared on MakeUseOf.Back to press