According to the IMF, Global inflation in 2023 will remain high, with the baseline expected to be 7.0 percent in 2023 and underlying (core) inflation declining more slowly. Given the impact of inflation on the value of assets, it is hardly surprising that investors are seeking out inflation-resistant options.
One such option is inflation-indexed bonds. This type of bond increases in value as inflation moves upwards. Often, they are linked to indexes that track the cost of goods, such as the consumer price index (CPI).
While inflation-indexed bonds provide a hedge against inflation, they are not without risk. Firstly, they are often pegged to just one index, which can lead to misleading results. Secondly, these bonds can impact investors' portfolios negatively during times of deflation.
Given that stablecoins are often linked to the US dollar, and that inflation in the US, as of mid-April 2023, was around 5%, the question arises whether a coin can be developed as a tool to hedge against inflation; this is the idea behind flatcoins. If successful, this could open the doors for investors in digital assets to mitigate the economic risk of inflation.
An example of a flatcoin is one called Nuon, developed by Laguna Labs and launched in 2022 on a testnet.
What Are Flatcoins?#
Flatcoins are one of the newest types of stablecoins available. Rather than pegged to traditional fiat assets, flatcoins are pegged to the cost of living. Nuon, for example, doesn't use just one cost of living index, such as the consumer price index (CPI). Instead, its Truflation algorithm tracks the prices of millions of items to calculate the changing cost of living. It recalibrates the cost of living estimates every day to keep levels as accurate as possible.
In theory, this crypto-purchasing power should remain constant despite increasing inflation. For instance, an apple valued at one Nuon today will still have the same value three years from now.
Unlike the defunct Terra stablecoin that was collateralized with the Luna token, Nuon relies on full collateralization with ETH and is not pegged to a fiat currency. The protocol incentivizes users to mint or burn Nuon, and a liquidity pool protects the price and the peg.
It is of course possible for the price of the flatcoin to deviate from the “real” value based on inflation data; over the course of April 2023 Nuon has been trading at around 1.4 USDT and on the 21st April was priced at at 1.36 USDT on CoinMarketCap, these figures representing inflation adjusted value that is very significantly higher than either US inflation or the global rate for inflation.
The launch of Nuon on Arbitrum was announced at the end of March 2023.
Can Flatcoins Help Investors Hedge Cost of Living?#
So, are flatcoins the answer to inflation? Can this type of investment truly enable you to retain the purchasing power of your crypto despite inflation? Some experts say it's a good first step.
Ray Dalio, a billionaire and founder of Bridgewater Associates, is in favor of this type of crypto. He stated,
I think that what would really be best is an inflation-linked coin … The closest thing to that is an inflation index bond, but if you created a coin that says OK, this is buying power that I know I can save in and put my money in over a period of time and transact in anywhere, I think that would be a good coin.
With the release of inflation-indexed flatcoins, it's only a matter of time before other blockchain developers follow suit. In fact, this new subsection of stablecoin has the potential to provide inflation-resistant alternatives.
Digital Asset Protection#
Whether you jump in and give new flatcoins a try, or stick with fiat-pegged or other stablecoins, you need to ensure your digital assets are protected not only from economic risk, but from custody and security risks as well. Keep in mind that not all DeFi insurance protocols are alike, so be sure to do your research and join a community to ask questions and find out what is best for you.
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