Flatcoins: Crypto-Native Store of Value | Chinmay Vemuri - dHedge

Hello. Hello. My name is Erman and I'm here with Flat Money to talk to you about flat coins. Maybe first a show of hands. Anyone here who has not heard of the term flat coin before?

Not heard of flat coin, never heard of flat coin. I'm not surprised. I'm assuming others have heard of flat coin. Have you heard of the term but you're not too sure what they are or you might have a small guess. Few hands.

And someone who's who's really familiar with flat coins, the current kind of standards and kind of where things are at. Nope. It's very new, right? Uh so yeah, hopefully um you know, we can we can learn a few things um from this talk. Uh I'll dive Before I dive into flat coins, I'll talk a little bit about stable coins and why flat coins are natural progression um with with on-chain stable assets in general.

Uh maybe a first question is ETH money? Uh show of hands for anyone who thinks that ETH is is money. Quite a few show of hands. Maybe I'll ask it at the end again. Um well, anyone feels strongly that ETH is not money?

One at the very top and uh no other hands. We got a we got a contrarian at the top up top there, probably a very good trader as well. Um so this is an interesting question for me that I like to ask people. And if you ask me in 2017 through the ICO boom, I would have said, "Yeah, yeah, ETH is, you know, definitely on-chain money." Um a lot of ICOs during that era, if you were around, were raising a lot of money and a lot of that was done uh with ETH.

And you know, that was really great for a lot of uh projects that did that at that time uh with you know, varying levels of legitimacy as well. But you know, ETH was going up in value, the treasuries were looking really strong, the runways were looking very long, the party was getting started, and just as it was, uh the hangover kicked in. And what happened there is is the projects that were left uh holding ETH just saw their treasuries just absolutely get crushed, their runways dwindle. Many didn't even get to launch, some launched but weren't able to basically continue. Um so, you know, going through this and and the projects that actually, you know, did quite well, what they did is is they decided they wanted to hop off this train at some point, and some of them timed this very well, and they essentially sold their ETH into their local fiat currency, and and were able to sort of continue with their projects.

Again, with varying levels of success, but at least they had a runway. So, fast forward to 2019, and at this time a little-known website called DeFi Pulse and decentralized finance was starting to kick off. And and what I love about this screenshot is is the list of um the list of assets down the the bottom there, you can see Uniswap at number three at 3.6 million TVL, which is crazy to think about uh today. You got Lightning Network at number four at 2.

8 million, which is probably still the same today. You've got MakerDAO and Compound at number one and two. So, this this side actually, you know, really got my interest is like, why are these lending projects kicking off? Um and really the catalyst for for growth of DeFi to start was stablecoins. Um so, I'm assuming most of you are familiar with stablecoins, and what we're talking about essentially uh is on-chain USD and and different ways uh that that they're collateralized, which we can dive into.

And since then, since the growth of of of stablecoins, we've seen it increasingly being used as a medium of exchange, even with crypto natives and ETH less and less. And that started happening a lot during um DeFi summer around 2020 2021 and we saw really the DFI protocol starting to integrate things like USDC and other stable coins as well. Um so I want to talk to you about stable coins just because there are some serious shortcomings and and I'd like to sort of dive into you know later on how we can improve that with the flat coin models. So if you're not familiar that you can categorize stable coins with three main categories fiat back crypto back or algorithmic and I'll just go through those and just to sort of give an overview and where things can go wrong. Um so with with fiat back stable coins we're mainly talking about USDC tether USDT essentially you know these tokens are minted on chain and there are some US dollars or treasuries US government debt held in a bank in in different jurisdictions depending on the on the on the asset and that's all fine until you know one day I woke up a year ago and I saw this with the USDC which was a real shock and it was kind of the opposite as to to what I actually expected when you know people were you know thought the USDC was the safe haven compared to USDT and still you got the USDT bears.

And and you know you look at the news and you're like okay there's a bank in the US okay that's that's going under okay there's contagion okay there's a bank run and it's affecting it's it's affecting USDC it's affecting DFI. This is quite a shock and obviously it didn't just affect crypto there are a lot of people talking about it you know the the government has to step in immediately otherwise there's going to be a loss of trust and of course the Fed steps in and and back to where we are and it's kind of like forgotten about everything's great. But but I mean this kind of introduces I don't think it's something we should just look over because there are these black swan events with these centralized stable coins and we are tied to a single jurisdiction with these assets and of course you know there are there are other risks. Good luck with that. But at the end of the day Circle who issues USDC, you know, if the government said okay, we need you to freeze arbitrarily accounts or we we're introducing these new regulations, this could happen and this this could this is not really this is an event that is plausible.

Talking about crypto backed stables a little bit different. Collateralized on chain typically with you know with crypto assets but traditionally with ETH the disadvantage with that is you need to lock in say $200 of ETH to mint you know $100 of of your stable. And you know, that's less capital efficient but also you know, typically you have to pay there's a there's a borrowing cost when when you're when you're when you're borrowing the the stablecoin but also you're riding the volatility of a collateral asset. So if you're collateralizing with ETH you're riding that volatility. If ETH goes down, you could get liquidated and and you could use that you could lose that collateral.

So it's not ideal. So so as a result, you know, the growth of of of these cryptos back stablecoins really you know, didn't take off as much as as much as the fiat ones. So Maker DAO they decided okay, I think we can we can actually create some better incentives. What we can do is we can back this with real world assets. So we can actually mint die to institutions and then they can you know, pay us some interest for that and they can maybe add some extra interest on top.

And this is great for growing this is great for growing the TVL. So this it might look something like this. You know, someone comes in institution comes in with a proposal, you know, give us 600 million die. We're going to sell it. We're going to put it in the bank.

We're going to re-lend it to to another you know, institution for for more interest or we'll buy you know, short-term treasuries and earn high interest than what we're paying you. And that's like a win-win situation until you kind of you know, dive in and go okay, from a Maker DAO DeFi perspective, you know, everything looks great. Dai goes out, Dai comes back in plus interest." But, as you dive down, you know, what happens on the you know, on the TradFi uh layer, it's like you know, there's a lot of flows, there are counterparties, you know, there's there's all this stuff. So, at the end of the day, you got the DeFi layer on top and underneath you got you got all the all the TradFi um down the bottom with you know, with everything that comes with that.

So, it's just less than ideal and of course, the algorithmic stable coins uh very controversial. Uh so, you could say they're unbacked. Technically, they're backed with a token that's tied to the protocol itself. So, there's very circular logic there as we've seen uh with Luna's UST. So, you can actually, you know, have this super fast flywheel where you can have really fast growth uh which is great and it's gone.

But, the the bottom the biggest issue at least for us, it's these are all pegged to the US dollar. Uh now, if if you ask me, you know, what you know, what what would be great, you know, on-chain you know, money, the new currency, you know, of the of of the internet, I I you know, I wouldn't have guessed, you know, years ago, ah it's on-chain dollars. At the end of the day, we're tied to a single jurisdiction and with that, obviously, you got all the inflation. Uh you know, you've got all the the monetary policy issues, you know, the the debt and and the question is, you know, can we really can we do better than that? Can we you know, what can we create better internet money?

Now, what does that mean? Can it maintain or beat purchasing power? In other words, can it beat inflation? Can it be done in a way that's fully backed with a very pure on-chain asset like ETH? Uh but, can we make it capital efficient?

None of this locking up 200% collateral. Just make it 100% um capitalized. Can we just power it with smart contracts? Do it fully on-chain? Forget about off-chain traditional finance um systems.

Make it accessible. Can we do it on L- Can we build it on base? Uh and really can we keep those external dependencies as minimal as possible to create a new primitive that can last for a long time. So, that's that's where we really thought about um building the flatcoin with with flat money. And with the with the flatcoin coming to the term, uh I believe it was it was um coined by Balaji initially.

And all it means is having flat purchasing power over time. So, if your bill say your electricity bill cost 100 flatcoin today, in 10 years time it still cost 100 flatcoin, not more. And and that's really what where the term flat comes from. And and the idea in some projects takes this literally is to track CPI. And this is again very US-centric.

Let's track US CPI. But for us, it's really about, you know, can we create a sustainable yield that can not only track, you know, beat some inflation metric in a certain country, but can it even beat um inflation? And can we make a decent so. What we came up with was unit. Uh so, unit is 100% backed by a Rocket Pools uh staked ETH.

Uh so, we find this to be the the the best um staked ETH uh liquid staking derivative. Uh and what we built is a two-sided marketplace. So, on one side we've got unit, which is the flatcoin. And you on the other side we're baked into the protocol a perpetual uh futures leverage uh for rETH. And I believe this might be the first um perp for for liquid staked um ETH.

And the way that works is you've got the two sides. And basically both sides just deposit rETH. Like no other assets. There's no stablecoins involved. It's just rETH.

And and the volatility um for the flatcoin is taken out by the long positions um for the long traders. In other words, they are the counterparty. So, another way to visualize this um with with say like the perps perps decks. So, you've got the leverage traders on the right hand side and they can take leverage on our ETH, but on the other side instead of just being short, you've actually got a delta neutral position um on the on the unit side and that's how the flat coin um basically works. If ETH goes up, if ETH goes down in real dollar terms, there's no real impact.

And the beauty of baking um the the perp side directly into the protocol is really the yield you can generate out of this. Obviously, if the market is bullish, um you typically have a funding rate in in a perps market. We call it the borrowing rate but essentially it's the same thing. They the leverage traders are going to pay some some interest uh to the unit holders. So, that's one source of yield.

Um all the trades because we it doesn't the protocol itself doesn't use any external um exchanges, every time someone trades, opens a leverage position, closes a leverage position, or even gets liquidated, all those trading fees again funnel into the unit holders. And what we've seen is is is the perps DEXs, they're popping up left, right, and center because they know there's demand for traders, the market is there, and the yields are good and they're sustainable. But instead of having to sort of, you know, bet on the market, what you can do is you can build a build a position like this where you don't have to take any volatility. You can get the leverage traders to do that for you. To use a simple example, you might mint uh one unit with one rETH.

Now, if if rETH drops in price or ETH drops in price by 50%, um essentially when you withdraw after that, because you are the counterparty to the long traders, you're going to get two rETH or roughly two rETH back, but you're going to on top of that also in rETH, you're going to get the borrow fees paid by the leverage traders, you're going to get the trading fees, and you're going to get the liquidation fees as well. I should say the borrow fees or the funding rate fees, when the when the rates are positive, which is typically in the bullish markets, it can flip the other way around as well. So, it's not a free lunch, but the yields in general are very, very good. So, essentially what we've what we're creating here is we're taking ETH, which is already a fantastic asset, great collateral, which is, you know, used deeply in DeFi. We're making it even better by leveraging the best decentralized LSD that's available right now with Rocket Pool ETH, which which has staking yield built into the token itself.

We take that, we put it in Unit, but what we do is we strip out the volatility at the protocol level itself without any other external dependencies. But on top of that, we got the perps yield that comes in with the with the product also. So, there might be some there might there's probably going to be a lot of presentations during the during ETH Denver this year that talk about real world assets, how we need to bring the real world into crypto to legitimize it, to you know, scale it. But but you know, we believe that we can this is this this field is very very new. We can build new pure on-chain assets that can be better, many times better than the traditional financial system.

So, if anything, we should be bringing on-chain to the real world and not the other way around. So, thank you for listening. We're going to have a booth at at the main at the main event. Come visit us. Come have a chat.

Flat Money Unit launches in March very soon. Thanks very much.