Flatcoin: Coinbase's Vision for Purchasing Power Stability in Crypto

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Since the 1990s, cypherpunks faced a major challenge when designing electronic cash: how to achieve decentralization while preventing double-spending. It wasn't until 2008 that this challenge was creatively addressed by Satoshi Nakamoto through blockchain technology and the proof-of-work consensus mechanism. The subsequent story is well-known.

After 15 years of development, Bitcoin still holds the top position in the industry by market cap. Decentralized application platforms like Ethereum have not surpassed it, highlighting its revolutionary significance. In this dimension, Bitcoin is undoubtedly a success.

However, from another perspective, Bitcoin falls short of success, as its original vision of becoming a widely used currency for daily payments has not been realized. Stablecoins like USDT, which are pegged to fiat currencies, now seem to dominate the industry as settlement currencies, a position that was originally envisioned for Bitcoin.

Bitcoin appears to have drifted away from its intended purpose as a peer-to-peer electronic cash system and has become a recognized digital gold of this era. This is directly related to another critical challenge that Bitcoin did not address, which is not widely known among the public: how to maintain the purchasing power of a currency on a decentralized basis.

Satoshi Nakamoto did not consider this when designing Bitcoin; the currency's total supply was fixed and produced by halving every four years. This has led to significant price volatility for Bitcoin, forcing us to resort to using centralized stablecoins like USDT for payments and settlements.

Even though there are many Bitcoin maximalists trying to downplay the lack of supply adjustment mechanisms in Bitcoin and argue that it won't affect its role as a daily payment and settlement currency, the global population is voting with their feet. Few are willing to use Bitcoin, which is primarily seen as a store of value with significant volatility, for daily payments. Furthermore, the performance of the Bitcoin Lightning Network data corroborates this fact.

The entire crypto world cannot sustainably rely on the US dollar as a surrogate for settlement; this fundamentally contradicts our vision. However, today, it seems that even Bitcoin may struggle to uphold the ideal of being the world's currency.

While few currently acknowledge Bitcoin's deficiency in adjusting its money supply, notable figures like a Bitcoin OG and economist Lawrence H. White have recently been speaking out, bluntly pointing out that gold offers better stability in purchasing power compared to Bitcoin. Furthermore, Brian Armstrong, the CEO of Coinbase, a leading crypto exchange that originally focused on Bitcoin trading, has recently emphasized that many are less willing to spend Bitcoin as currency today, proposing the direction called "Flatcoin.”

Screenshot of Flatcoin idea from coinbase

"The economy is now flat" means that the economy has not experienced any significant changes, either increase or decrease. When applied to a currency, it means that its purchasing power does not experience drastic fluctuations. Brian also explicitly stated that this Flatcoin should be decentralized, not pegged to fiat currencies, and track the Consumer Price Index.

Thanks to Coinbase's influence, the issue of currency supply adjustment, which Satoshi Nakamoto had chosen to avoid fourteen years ago, has returned to the forefront of the industry: "How can we achieve decentralization, prevent double-spending, and maintain purchasing power stability simultaneously?"

Risks of Indexed Flatcoin

Regrettably, Brian's exploration of indexed flatcoin faces significant challenges, primarily related to the process of indexing.

These eight risks include:

1. Centralized Execution Risk: Index-based anchoring relies on the single-point execution of a managing institution, leaving room for malicious decoupling.

2. Data Manipulation Risk: Indices issued by companies or governments can be controlled and manipulated, failing to reflect real market conditions.

3. Index Base Price Risk: Indices are denominated in fiat currencies, which themselves can experience price volatility.

4. Technical Failure Risk: The index itself can suffer from technical distortions, leading to incorrect market price sources.

5. Scope of Assessment Risk: Indices may struggle to encompass the demand and price fluctuations of a basket of goods driven by technological advancements.

6. Representational Risk: Real-life demands are constantly changing, making it difficult for indices to accurately represent real-time needs and weightings.

7. Data Security Risk: On-chain data relies on external inputs, posing security vulnerabilities through Oracle systems.

8. Manipulation Risk: Hackers, major capital entities, or powerful institutions can manipulate the data sources of the index, capitalizing on asymmetric risks.

These eight risks cannot be entirely eliminated. So, is there a way to achieve purchasing power stability without anchoring to any published index?

Flatcoin: Based on Gold Supply Adjustment Mechanism

Let's start by carefully examining the stability of purchasing power provided by gold. Although gold has withdrawn from the stage of daily currency due to the high costs associated with its physical form, we can explore the principles behind its currency mechanism.

Historically, a significant advantage of gold as a currency is its natural system for maintaining purchasing power, known as the supply-adjustment mechanism. This system effectively operates based on the production cost of gold and market competition in its price, without the need to be tied to any index.

When the price of gold rises, it incentivizes more gold mining and reduces the use of gold in industries, jewelry, and collectibles. Some individuals may even melt down their jewelry to create gold bars, thereby increasing the supply of gold in the market.

Conversely, when the price of gold falls, gold mining decreases, industrial use rises, and more gold is fashioned into jewelry and collectibles, reducing the circulating supply of gold. This mechanism allows gold to maintain relative purchasing power stability throughout history and serve as a global medium of exchange for daily settlements on a large scale.

In other words, if there were a mechanism similar to gold, with cost adjustments and a free market to adjust the currency supply, purchasing power stability could be achieved organically.

Bitcoin possesses the cost mechanism of gold but lacks a stable mechanism to adjust its currency production according to market demand. This is the reason why Bitcoin can retain value over the long term but struggles to maintain purchasing power stability.

At the same time, nearly all current algorithmic stablecoins lack cost systems similar to those of Bitcoin and gold. This is why algorithmic stablecoins, while capable of short-term price stability, are prone to long-term instability.

Is it possible to build a cryptocurrency that mirrors the purchasing power stability principles of gold while standing on the shoulders of Bitcoin?

We can evaluate this by considering the following 7 points:

1. Decentralization Level: Achieving a degree of decentralization equal to or greater than Bitcoin, both in terms of technology and operations.
2. Fair Currency Distribution: Implementing a fair distribution without reserves, pre-mining, or private sales, ensuring that no one can bypass market competition to obtain shares.
3. Effective Adjustment Mechanism: Establishing a flexible currency supply adjustment mechanism that can adapt to both long-term and short-term needs. Theoretically, this mechanism could adjust the supply faster than gold, matching long-term economic growth and smoothing short-term price fluctuations.
4. Incentive Mechanism: Having a reasonable incentive structure to promote the rapid development of the currency.
5. Economic Principles: Being supported by economic theories without violating fundamental economic principles, ensuring the model's rationality.
6. Technological Advancement: Possessing a more mature blockchain architecture than Bitcoin, capable of supporting various technological advancements and use cases.
7. Production Cost: Incorporating a cost mechanism similar to Bitcoin or gold, such as Proof of Work.

If all these evaluation criteria can be met, then the currency supply adjustment problem that Satoshi Nakamot once avoided might be solved. We could have an electronic cash that achieves decentralization, prevents double spending, and allows the currency supply to adjust autonomously.

This appears to be an almost perfect currency system and has the potential to become a greater cryptocurrency, following in the footsteps of Bitcoin and Ethereum. With this robust foundation, the crypto space is poised for even greater growth and prosperity.