A cryptocurrency linked to a cost of living index is now available to select users on Ethereum scaling solution Arbitrum.
DeFi protocol Nuon announced in a blog post that it would be gradually rolling out its NUON flatcoin over the course of a month-long trial.
Once operations are confirmed to run smoothly, the cryptocurrency will be available to all users for permissionless minting via added collateral.
The protocol has chosen this “guarded launch” approach to minimize financial risks and repercussions.
“The guarded launch means that the WebApp will be alternating between Open and Closed states so as to better manage and control the launch and protest user’s funds,” the company said in a blog post.
What is a flatcoin?
Flatcoins operate similarly to stablecoins, but rather than being pegged to the value of an asset — such as the US dollar or gold — it is pegged to an independent measure of the cost of living and its purchasing power remains “flat.”
The concept of this type of cryptocurrency is not entirely new. It has been discussed by the likes of Brian Armstrong and Vitalik Buterin, who noted in a podcast in August last year that “there is value in having some kind of cryptoasset that is intentionally designed to be as stable as possible.”
In the case of Nuon, its flatcoin is designed to hedge against inflation by recalibrating its daily value to account for the rising cost of living, using the Truflation Index as an oracle.
Stability and design
Nuon maintained its peg through what the team calls a “triple redundancy mechanism” where the protocol incentivizes users to “mint or burn NUON.”
If the price goes above the peg, the liquidation ratio drops, creating an incentive for users to mint more and sell the token. On the other hand, when the price of the token dips, the liquidation ratio increases, urging users to increase collateral or burn NUON to maintain safe collateral.
That means minters will have to have a reason to risk their collateral and watch the liquidation ratio closely.
Nuon CEO Stefan Rust acknowledges the risk but remains optimistic.
“Our vision for Nuon — inflation-proof money — is ambitious to say the least,” Rust said.
The mechanics differ from the failed Terra USD design in that NUON is only minted from collateral. In theory, that should put a buffer for the arbitrage mechanism to keep the peg.
Just as decentralized protocols are the answer to risks posed by centralized currencies, and over-collateralization is the answer to maintaining value in the face of market instability, inflation-proof flatcoins are the solution to preserving value over time.”
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