Flatcoin: Inflation-Adjusted Stablecoin

Flatcoin is an emerging token economics concept designed to serve as a value storage token that can adjust its value according 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, which is an inflation-adjusted version of DAI. i-DAI will anchor to a certain reference point in time and adjust its price in real-time according to inflation to maintain the purchasing power of holders. This concept can be realized through the controller-based stablecoin (CBS), with existing examples in practice such as RAI.

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 growth of token supply, which should actually be termed "dilution." This article adopts the traditional definition.

In an inflationary environment, currency holders experience a decline in purchasing power, undermining trust in the currency and economic system. Therefore, inflation is a key indicator of economic health, and central banks around the world strive to maintain a low annual inflation rate. However, this is not an easy task, as the recent global economy has shown.

In light of the current high inflation pressure, some have proposed designing an inflation-adjusted Flatcoin to maintain purchasing power and resist economic uncertainty. However, this faces numerous challenges, including accurately perceiving inflation and creating appropriate incentive mechanisms.

Inflation involves the dynamic interactions of multiple factors in complex adaptive systems. The design of flatcoins must consider:

1. Low time granularity of the inflation index
2. Sensor measurement has difficulties in time and space adjustment.
3. Complexity of Sensor Fusion and Controller Design
4. The Challenge of Implementing Incentive Mechanisms for Flatcoin Economic Changes

One feasible approach is to draw on the ideas of successful stablecoins, using the concept of a controller to "perceive" price changes and adjust the incentive mechanism. RAI is an example of this type of controller-based stablecoin (CBS).

RAI uses an unsupervised PI controller to guide economic incentives, perceiving the RAI/USD price through oracles. Users can obtain over-collateralized RAI loans using ETH, with the debt interest rate determined by the PI controller. The rate adjustment is based on the difference between the market price and the redemption price.

RAI can maintain relative stability due to its counter-cyclical incentive mechanism. When the market price significantly differs from the redemption price, rational users have the incentive to arbitrage, which drives the price to converge. RAI can achieve price stability without directly relying on USD reserves.

The key to designing Flatcoin is: 1) inflation oracle; 2) moderately adjusted controller. The main challenges include:

1. Design sensors to collect price signals
2. Input the signal to the controller for processing
3. Provide incentive-driven market adjustments to Flatcoin value

From the perspective of control theory, the design of Flatcoin involves: the controlled object ( commodity service market ), sensors ( collecting price signals ), controllers ( processing signals to estimate interventions ), and actuators ( providing incentives ).

Inflation adjustments face many challenges, such as the location of inflation, the affected parties, and the types of goods involved. There are discrepancies between inflation indices, the time granularity is low, and changes in purchasing power can immediately affect daily life.

Flatcoin design needs to consider the scope of use, as it may face high volatility in high-inflation regions. Choosing inflation measurement standards is also challenging, as regional and group differences must be taken into account. Accurately and promptly measuring inflation increases the complexity of the design.

It is recommended to adopt a proof-of-concept design with minimal functionality, starting with a regional index Flatcoin within a single currency market. The long-term goal is to design a global composite index inflation token to address arbitrage issues, but more conceptualization and design work is needed.