Flatcoin: Inflation-adjusted stablecoin

Flatcoin is an emerging token economics concept designed to serve as a value storage token that can adjust its value in response to inflation changes. The goal of Flatcoin is to maintain the purchasing power of token holders or specific groups.

Taking the fictional "i-DAI" as an example, it is an inflation-adjusted version of DAI. i-DAI would anchor to a reference point in time and adjust its price in real-time with inflation to maintain the purchasing power of its holders. Although i-DAI is currently just a concept, it can be realized through the controller-based stablecoin (CBS), such as RAI launched by Reflexer Labs.

Definition of Inflation

In economics, inflation refers to the general rise in prices leading to a decrease in the purchasing power of money. In the web3 space, inflation is often used to describe the impact of token supply growth, which is more accurately referred to as "dilution" in traditional economics. This article adopts the traditional definition of inflation.

In an inflationary environment, the purchasing power of currency holders declines, weakening trust in the currency and economic system. Therefore, inflation is a key indicator for measuring the economic system, and central banks around the world are committed to keeping the annual inflation rate of fiat currency at a low level, typically 2%-4%. However, this is not an easy task, as evidenced by the high inflation pressures facing the global economy recently.

Flatcoin Design Challenges

The design of Flatcoin faces several core challenges:

1. Low time granularity of the inflation index
2. The difficulty of sensor measurement and time adjustment
3. The complexity of sensor fusion and effective controller design
4. Challenges of achieving economic changes in Flatcoin through appropriate incentive mechanisms

These challenges arise from inflation as a complex adaptive system, involving dynamic interactions of numerous factors and variables, including unpredictable human behavior.

Controller-based Semi-stablecoin: A Feasible Flatcoin Design

One promising approach to building Flatcoin is to draw on the ideas of currently successful stablecoins, using the concept of a "controller" to "sense" price changes and adjust participant incentives to align the token value with the reference value.

The representative of this controller-based stablecoin (CBS) is RAI. RAI employs an unsupervised PI controller to guide economic incentives and uses oracles to "sense" the RAI/USD price in real-time, aligning its value with the trend of the US dollar.

RAI allows users to collateralize ETH to obtain RAI loans. Outstanding debts are denominated in RAI, with an interest rate of (, and the redemption rate of ) is defined by the PI controller. The available loan amount is determined by the redemption price, which typically differs from the RAI market price by about 1%.

The reason RAI can maintain relative stability is due to its counter-cyclical incentive mechanism. When there is a significant difference between the market price and the redemption price, rational users have an arbitrage motive, which drives the prices to converge.

The design of RAI provides a starting point for building the Flatcoin MVP, requiring two elements:

1. Inflation Oracle
2. Moderate Adjustment Controller for Measuring Inflation

Distributed Control Challenges

The main challenges faced in building Flatcoin include:

1. Design a sensor network to collect relevant price signals at appropriate frequencies and locations.
2. Combine the signals at the appropriate spatiotemporal scale.
3. Design the controller, process signals, and estimate the required market intervention.
4. Provide executors to drive secondary market adjustments of Flatcoin value through incentives.

Challenges of Inflation Adjustment

Tokens that track inflation rates to maintain purchasing power need to consider: Where is inflation occurring? Who is affected? Which goods and services are impacted?

Inflation is not a singular phenomenon. Different inflation indices (, such as the GDP deflator, CPI, and PPI ), vary significantly in terms of geographical location, industry, and other factors. These indices also have a low time granularity, while changes in purchasing power can immediately affect daily life.

Choosing an appropriate measure of inflation is also challenging, as inflation varies significantly across different regions and industries. Standardized indicators such as CPI do not take into account the differences in purchasing power among different groups.

In addition, accurately and promptly measuring inflation adds design complexity, making the token susceptible to potential manipulation. The reliability and "trustworthiness" of the oracle subsystem are crucial for the Flatcoin system.

Suggestions for Advancing the Implementation of Flatcoin

It is recommended to adopt a proof of concept (PoC) design and pilot implementation with the concept of minimal functionality ( to achieve the initial design goals. The PoC can have upgrade capabilities to gradually address more specific design challenges.

A simple starting point is to first limit the inflationary spatial component, beginning with the regional index Flatcoin and the scalar price index within a single currency market. However, this simple design may face arbitrage challenges.

In the long run, global composite index inflation tokens can solve arbitrage issues and have more robust use cases. However, this requires more conceptualization and design work to address various challenges.

With the deployment and evaluation of the first PoC, the R&D of sensors, controllers, and actuators can gradually be carried out, ultimately achieving a globally scaled Flatcoin that covers diverse and multi-space indices.

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