Is flatcoin, backed by Coinbase's founder, a good idea?
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Is flatcoin, backed by Coinbase's founder, a good idea?
Flatcoin now has practitioners, but it may not be suitable as a medium of exchange.
Navigating Web3 tides with focused insightsAuthor: JP Koning
Translation: Luffy, Foresight News
Let me be clear from the start: I don’t think flatcoins are a good idea.
The concept of flatcoins has existed for a while, but it only gained widespread attention after being featured in an article by Coinbase earlier this year (https://foresightnews.pro/article/detail/42093). Now, even crypto’s most vocal critic, “Dr. Doom” Nouriel Roubini, has switched sides and is reportedly launching (https://www.ft.com/content/7774da77-048d-4e75-8350-4fec136cb18f) crypto-based flatcoins—tools that appear to represent a “path forward” for the medium of exchange.
What is a flatcoin?
If you hold a stablecoin worth $1 or a Wells Fargo bank deposit worth $1, both remain fixed at $1 indefinitely. In contrast, a flatcoin slowly increases in value over time to compensate holders for inflation-induced erosion of purchasing power. So if today you own a flatcoin valued at $1, tomorrow it will be worth $1.0001, the day after $1.0002, and so on. After 12 months, its value would reach $1.05. This 5% appreciation protects you against 5% inflation, preserving your real purchasing power.
Roubini and Coinbase market flatcoins as a blockchain-native innovation, but the idea could just as easily be packaged into traditional financial products without any blockchain. Imagine a Wells Fargo account holding a fixed balance of $100, growing annually by 3–4%. Or consider a note (a “flatnote”) whose issuer promises to repurchase it at a higher price, thereby linking its purchasing power to inflation.
Roubini sees flatcoins as a potential “global means of payment.” When it comes to money and payment technology, I disagree. I believe flatcoins are an evolutionary dead end.
One of the key reasons why money is so popular is that it seamlessly integrates with the primary business language we use in everyday economic life.
What does “business language” mean? We speak and bargain in dollars. We think and plan in dollars. We dream in dollars. We remember things in dollars. Every aspect of our daily commercial lives revolves around this fundamental unit of measurement. (In Europe, the euro serves as the foundation of business language; in Japan, it’s the yen.)
The dollars in our pockets (and those in our bank accounts, and stablecoins in our MetaMask wallets) are carefully designed to be fully compatible with the dollar unit we refer to in speech. That is, our medium of exchange is pegged to the $1 unit. For example, if I need to pay $1,500 in rent next week, I know that 1,500 units in my bank account can fulfill that obligation. The same clarity doesn’t apply to my other assets—my S&P 500 ETF, my gold, my government bonds, or my Dogecoin.
This standardization is a convenient feature. It eliminates many hassles in daily commercial life. It means we don’t have to constantly translate between the dollar medium in our wallets and the dollar unit in our speech, thoughts, and plans when buying or budgeting. As Larry White once said, aligning the units we use in spoken language with those we transact in “reduces the information required for economic calculation by buyers and sellers.”
Because everyone tends to use these highly useful standardized units for payments (i.e., deposits, stablecoins, and paper currency), markets around them have become highly developed. This, in turn, makes them even more useful for payments, reinforcing their dominant position.
By contrast, flatcoins are incompatible with the dollars we use in everyday speech. One unit of flatcoin might be worth 1.1145 times today’s spoken dollar, 1.1147 tomorrow, and 1.1205 next month. This erases one of money’s most human-friendly features—its alignment with commercial language—and alienates anyone who might otherwise use it for daily spending. As a result, flatcoins will be less liquid than standardized 1:1 dollar equivalents, and this lack of liquidity will make them less useful as a means of payment.
A second problem with flatcoins comes from taxation. Because flatcoins appreciate over time, every purchase made using them generates a small taxable capital gain. This creates administrative burdens, making people even less likely to adopt flatcoins as a daily medium of exchange.
This linguistic mismatch doesn’t mean people won’t hold flatcoins—they may serve as long-term savings vehicles, much like how people buy and hold fixed-income ETFs. But unlike Nouriel Roubini, I don’t see them as the “path forward” for the medium of exchange. No one is going to buy coffee with flatcoins.
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@jp_koning
