Beware of Flatcoins, Anti-Inflation Fashion Cryptos

[ad_1]

These coins are designed to protect stablecoin holders from inflation. But they are complicated and it is not clear if they will actually work.

Stablecoins are digital tokens created to reflect the value of hard currencies like the US dollar. They are essential for liquidity in the $1.2 trillion crypto market as investors need a stable and predictable place to store money, in part because bitcoin, which will swing up to 10% in a single day, has largely failed as a store of value. There are $120 billion in stablecoins in circulation. Unfortunately, their history is anything but stable.

In May 2022, TerraUSD, a stablecoin dreamed up by a Stanford-trained South Korean programmer named Do Kwon, collapsed because its value was based on an algorithm that proved unreliable in the face of an asset run. Over $45 billion in market value evaporated in a single day, causing the crypto market to plummet. After being on the run for nearly a year, Do Kwon was recently arrested in Montenegro. Then there’s the world’s largest stablecoin issuer, Tether, which has $80 billion in assets, but has long avoided even the most basic disclosures (like where it is) and has had many difficulties. with regulators. On several occasions, the US dollar coin Tethers (USDC) broke the ball and dropped below $1.00 in value.

Even the most regulatory-compliant and transparent stablecoin, Circles USD Coin (USDC), which has $30 billion in assets, disappointed investors. When Silicon Valley Bank collapsed on March 10, Boston-based USDC issuer Circle admitted to having $3.3 billion on deposit with the bank, most of it uninsured. USDC price lost its peg, plunging to 0.88 cents on March 11.

But stablecoins are still essential for serious players in the digital asset world, and hope is eternal in crypto, so a new product has hit the market called promising an inflation-adjusted version of stablecoins. Dubbed flatcoins, these new tokens are designed to maintain purchasing power parity with a basket of goods by keeping pace with inflation.

So far, only around $100 million worth of flatcoins have been minted, but with inflation stubbornly stuck at 4.6%, demand for these new tokens is growing. Coinbase is already actively seeking to seed flatcoins on its new Ethereum Layer 2 blockchain base.

We are fascinated by the deep thinking behind the decentralized design of stablecoins and are particularly interested in stablecoin flatcoins that track the rate of inflation, allowing users to have purchasing power stability while withstanding uncertainty. caused by the legacy financial system, Coinbase wrote in a recent post.

Flatcoins are the brainchild of former Coinbase CTO Balaji Srinivasan and an Iranian-born programmer, Sam Kazemian, who came up with a stablecoin protocol named Frax in 2021, and a tracking index of inflation called Frax Price Index (REIT).

The term flatcoin was basically meant to mean by me and Balaji that it stays flat at a standard of living,” explains Kazemian who notes that his new flatcoin would be partially backed by collateral like USDC, and partially algorithmically stabilized.

Here are the basic mechanics of the new inflation-protected stablecoins. The first thing the Frax programmers set out to do was to identify a target standard of living to follow. Kazemian created a feed with a blockchain data provider called Chainlink to publish the Federal Reserves Bureau of Labor and Statistics (BLS) CPI on the Ethereum blockchain each month. With the current 12-month inflation rate at 5%, Frax has a set of smart contracts programmed to automatically perform algorithmic trades in an effort to earn enough profit to match the monthly inflation print sent by Chain link.

Frax Price Index vs. Consumer Price Index Below is the 12 month high for flatcoin, FPI vs. CPI. Its tracking mechanism is based on smart contracts, algorithms and DeFi returns.

In theory, this would mean that if a single tether or USDC is still worth $1.00, in a world of 5% inflation, a REIT would be redeemable for $1.05 of collateral. In order to earn the amounts needed to cover the inflation premium, the Kazemians team invests collateral in DeFi lending protocols such as Aave and Convex, which primarily focus on stablecoin markets. These DeFi protocols earn yield by allowing borrowers to access their tokens. These returns then become available for FPI coin changers to withdraw. However, the REIT is managed by a decentralized autonomous organization, which may make changes to its risk parameters in the future.

If that sounds complicated and risky, it is, especially compared to simply owning a stablecoin like USDC and simultaneously hedging with something like a gold ETF or even gold-protected securities. Treasury inflation (TIPS), where the US government effectively hedges inflation risk.

Even more complicated is another flatcoin called Nuon. Rather than just matching the BLS inflation reading, it has partnered with a sister company called Trustflation to produce real-time inflation data based on a proprietary methodology. For example, while BLS inflation includes eight major categories: food and beverage, housing, clothing, transportation, medical care, recreation, education and communication, and other goods and services, Trustflation includes 12. Additions include clothing/ shoes and alcohol/tobacco. . The company also weights categories differently from the BLS and pulls data in real time through service agreements with various vendors instead of relying solely on monthly updates.

When we studied inflation, we realized that it was calculated by 477 people on a monthly basis in a nebulous way, says Stefan Rust, CEO of Trustflation and Nuon. We decided to take a developer approach, take the same steps, pull them from the APIs, and update them in real time.

While no one is claiming that the collection and indexing of official inflation data does not have many flaws, including an outdated monthly production schedule, Trustflations Moneyball’s approach to calculating inflation data in real time is not without drawbacks.

When inflation is between 1.5% and 2.5% per year, it’s probably a bit of a stretch, but when headline inflation is 8% to 9%, those numbers can be meaningful on a day-to-day basis. , says Peter C. Earle, an economist at the American Institute for Economic Research. I think it’s interesting to capture daily or intraday inflation data, but I also think there’s a lot of statistical noise.

This noise could become deafening if the data streams that determine prices and return targets, known in the crypto world as oracles, were corrupted. Crypto forensics firms report that so-called oracle manipulation attacks cost investors $362 million last year. It is not impossible to foresee a scenario where an oracle is manipulated to force one of these platforms to use a riskier trading strategy than expected.

But data collection isn’t the only concern flatcoin buyers need to worry about. Behind the Nuons Inflation Protection Guarantee lies a complicated and potentially risky proposition. When an individual strikes Nuon, they must deposit Ether into their protocol, which then automatically purchases the same amount of Nuon from the open market and deposits it into a DeFi protocol such as Uniswap or Pancakeswap. The income generated from this deposit, known as yield farming, is added to a users collateral position (which is the original ether) essentially as insurance. So, unlike the REIT, nuon positions are overcollateralized – for example, a user must deposit $1.30 of ether to mint $1 of nuon.

In Trustflation They Trust In its short history, Nuon exceeded its inflation target. His team expects arbitrageurs and growing market liquidity to bring it back to par.

So far, FPI and Nuon have struggled to keep up with inflation (see charts). According to CoinGecko, the REIT is currently priced at $1.08, but in its almost 12 months of existence, it has traded as low as $1.18 and as low as $0.92, which would imply that over the past 12 months, inflation has reached 18% and is below 1%. Nuon has significantly outperformed inflation in its short existence; it was only launched in March. Right now, it’s priced at $1.24, but it’s hit $1.44.

While flatcoins are meant to be the next evolution of digital safe money,” the biggest stablecoin players have yet to sign on. Circle, which issues USDC, has no plans to issue a flatcoin Circle already has over $25 billion in short-term Treasuries backing its USDC tokens, but buying TIPS is prohibited because they’re not issued for terms shorter than five years Tether hasn’t responded to requests for comments.

Flatcoins are so new that they do not yet appear in any of the current stablecoin regulation bills circulating around Capitol Hill. The bipartisan draft presented in April proposed a ban on new algorithmically derived stablecoins such as TerraUSD/LUNA, where the stablecoin was backed by a sister token. Flatcoins use computer algorithms to derive their valuations, however, in their current incarnation, they do not fit the bills specific description perfectly. Still, any new stablecoins would need to be issued by a state- or federal-licensed entity, so these products would need a backer if they expect to go mainstream.

Rust says there are no restrictions on users in the United States to mint Nuon at this time. I guess they are in a bit of a gray area [with regards to how flatcoins fall under securities regulation]… For the moment, everything indicates that stablecoins pegged to the dollar or the euro will be subject to regulation.

Forbes called on various lawmakers and regulators involved in the recently proposed stablecoin legislation to ask about flatcoins, but most hadn’t even heard of it yet. Said Rep. Brad Sherman (D-CA), a noted crypto critic, “We already have something like this. They are called TIPS.

MORE FROM FORBESMORE FROM FORBESTrump didn’t see inflation coming — and it’s costing him more than a million dollars a monthBy Dan AlexanderMORE FROM FORBESThe 10 highest-paid athletes in the world in 2023By Brett KnightMORE FROM FORBESMicrosoft wants to automate medical notes with GPT-4 – but doctors need to be convincedBy Katie JenningsMORE FROM FORBESTikTok Parent ByteDance’s ‘Sensitive Words Tool Monitors Discussion Of China, Trump, UyghursBy Alexandra S. LevineMORE FROM FORBESThe Kingdom of Bhutan has been quietly mining bitcoin for yearsBy Iain Martin

[ad_2]