In recent years, stablecoins and flatcoins have emerged as two different approaches to bringing price stability to the traditionally volatile cryptocurrency market.


Stablecoins are cryptocurrencies that are pegged to an external asset like fiat currency or commodities in order to stabilize their price. The most popular stablecoins today include Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) which are all pegged to the US dollar.

Flatcoins on the other hand are not pegged at all, but rely on monetary policy protocols built into the cryptocurrency itself to algorithmically adjust coin supply and stabilize the price. Examples of flatcoins include Basis, Carbon, and TerraUSD.

So which approach is better for the future of crypto - having price-stable assets pegged to real-world assets or creating standalone cryptocurrencies that are price-stable by design? This article will compare and contrast stablecoins and flatcoins and argue that while both have their merits, ultimately flatcoins represent a more decentralized and "crypto native" path forward.

The Case for Stablecoins

The main argument in favor of stablecoins is simplicity and trust. By pegging a cryptocurrency to a real-world currency like the US dollar, stablecoin issuers can reduce volatility and provide a simple value proposition to users - 1 stablecoin = $1. This makes doing financial calculations and storing value much easier compared to highly fluctuating cryptocurrencies like Bitcoin and Ether.

Additionally, some stablecoins like USDC and BUSD are issued by trusted regulated financial institutions like Circle and Binance. This means they have strict reserve requirements where $1 in bank deposits or short-term US treasuries must back each coin in circulation. This creates trust in the stablecoin's ability to actually be redeemed for the pegged asset if necessary.

Stablecoins have already seen massive adoption, especially in crypto lending/borrowing markets.

Overall, stablecoins offer crypto a bridge to the traditional finance world. They provide an easier starting point for institutions to understand crypto value and could pave the way for innovative smart contracts leveraging predictable stable assets.

The Case for Algorithmic Flatcoins

While stablecoins rely on external pegs for stability, flatcoins like Basis, Carbon, and TerraUSD aim to be completely autonomous cryptocurrencies that provide price-stability via internal monetary policy mechanisms.

For example, Basis issues three different token types and expands/contracts the supply of each dynamically in response to changes in market conditions to keep its value pegged to around $1. No external collateral or asset reserves are needed to maintain the peg - it's entirely codified in the token protocol's logic.

Other flatcoins use similar, but slightly varied approaches featuring bonding curves and dynamic interest rates charged on coin holdings.

The main advantage cited by flatcoin advocates is better decentralization and autonomy. Flatcoins only rely on their own transparent and auditable software protocols for stability, not any particular company or asset. This also means governance is built into the blockchain as token holders can vote on monetary policy changes over time. There is no central point of failure or third party to trust as would be the case with fiat-backed stablecoins.

In theory, this on-chain autonomy also allows flatcoins to scale supply more flexibly and quickly in response to black swan financial events. Of course, their stability mechanisms remain largely untested at large scale thus far.

While early flatcoins like Basis failed due to regulatory and funding issues, newer iterations seem to have ironed out some kinks. For instance, TerraUSD has recently attracted billions in market cap backed in part by greater transparency tools for monitoring its stability reserves. Other ecosystem partners are also emerging around flagship flatcoins creating useful applications for stable programmable payments.

Conclusion: Flat Money is the Future But Stablecoins Still Have a Role

Flatcoins represent an ideal of a price-stable crypto asset class that is autonomous, scalable, and independent from the legacy financial system. Their transparency and programmability also make them well suited for smart contract innovation.

However, stablecoins still dominate for now due to their simplicity and reserves assurances. Mass consumer adoption may need these fiat on-ramps for some time until confidence in more complex flatcoin models can be built. Private stablecoins also fill an important niche allowing tokenized fiat to move efficiently across borders.

Ideally, stablecoins and flatcoins could coexist to provide different risk/reward options for investors while both contributing to wider blockchain innovation. Flatcoins may become the base settlement layer for programmable finance across chains, while stablecoins bridge the growing gap with traditional finance.

But make no mistake, flatcoins represent the most cypto-native approach to achieving price stability on the blockchain without currency pegs. Over the long term, crypto should strive to become independent from fiat and let monetary experiments like algorithmic flat money thrive on their own autonomous merits.

Examples Comparing Major Stablecoins and Flatcoins

To better understand the pros and cons of stablecoins vs flatcoins in practice, let's compare some of the most popular options in more detail:

Tether (USDT) - The Largest Stablecoin

- Pegged 1:1 to the US dollar and other major fiat currencies
- Issues and redeems tether coins based on market demand
- Backed by reserves of cash, cash equivalents, and other assets
- Centralized issuance by Tether company
- Simple stability model but some doubts about reserve transparency

USD Coin (USDC)

- Stablecoin issued by Circle and pegged to the US dollar
- Fully backed 1:1 by cash reserves and short-term US Treasuries
- High transparency with monthly attestations of reserves
- Used widely in DeFi protocols as stable lending collateral
- Centralized issuance through approved financial institutions
- Simple stability model with verifiable reserves


Basis Cash (BAC)

- Algorithmic flatcoin project revived after earlier Basis stablecoin failed
- No external collateral or asset reserves for stability
- Uses algorithmic monetary policy based on token supply expansions/contractions
- Three interlocking token types for bonds, shares, and currency
- Stability relies entirely on protocol incentives and supply dynamics

Conclusion

While the crypto world is currently dominated by stablecoins thanks to their simplicity and reserve assurances, flatcoins offer a glimpse into a more decentralized but complex stability solution. Each offer different tradeoffs between autonomy, transparency, and reliability that cater to different user needs. However, if blockchain-based finance continues maturing, we may eventually see models like today's flatcoins become dominant for stability-as-a-service without centralized issuers. This would represent the crypto world becoming truly stabilized from inside rather than relying on external pegs - a flatter, freer system for programmable money.

If you enjoyed this article, please read my previous articles

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The Basics of Yield Farming: How to Earn Passive Income in DeFi
Four elements of DeFi value discovery
Decentralized Liquidations: Critical Knowledge for DeFi Borrowers
What are the risks in DeFi opportunities?
The Power of Automated Market Makers in DeFi
Asset Management in DeFi

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