Edge Podcast - Flat Money: The First Flatcoin on Base

In this episode of The Edge Podcast which took place on May 18, 2024, DeFi Dad, Nomatic, Brave New DeFi, and Ermin discuss how $UNIT promises to be a better form of on-chain money, how Flat Money offers a double-digit yield for $UNIT holder and more. Read our notes below to learn more.

Background

DeFi Dad (Host) – Host of Edge Podcast
Nomatic (Host) – Co-Host of Edge Podcast
Brave New DeFi (Guest) – Advisor to Flat Money
Ermin (Guest) – Founder of Flat Money
Flat Money – a flatcoin backed by $rETH and provides a steady yield

Why Flat Money

He adds that flatcoins like $UNIT provide a better alternative to fiat-tied stablecoins by offering increased flexibility and potential for growth without being constrained by fiat currencies. The founding team’s background includes experience in creating delta-neutral strategies within DHedge, leading them to develop the concept behind flat money.
Brave says that previous attempts at creating decentralized on-chain money faced inherent risks and instability due to scaling limitations, motivating the development of flat money.
He describes an alternative financial system where money is backed by assets held in a bank by a company lacking transparency. Large companies control 96% of the stablecoin market cap in the crypto ecosystem. Flat Money aims to be on-chain, decentralized, and not tied to the traditional financial system for increased security.
Brave says that flatcoins are seen as simple, elegant solutions to decentralized money problems with unique scalability potential. Using liquid staking tokens as backing assets can unlock scalability for centralized money.
He adds that flatcoins are designed to be yield-bearing assets that outpace inflation over time with decentralized collateral backing. The term “flat” refers to maintaining purchasing power rather than being stagnant.

How do we know a flatcoin is working

Ermin differentiates between $RAI and flatcoins; $RAI lacks native yield-bearing features while flatcoins aim to outpace inflation over time.
He adds that yield-bearing assets vary based on underlying units held. Feedback loops can impact asset value in different ways. New low-volatility assets trigger past experiences and questions about risk similarities.
Ermin says that Flat Money $UNIT’s yield originates from the leverage side, creating a two-sided marketplace. Leverage traders take high-volatility bets while $UNITholders maintain a delta-neutral position.
He adds that the protocol facilitates earning funding rates as additional yield through trading fees. Flatcoin is designed to appreciate in value over time, offering a simple form of on-chain money for preserving purchasing power.
Ermin says that evaluating earned yield against inflation rates aids in assessing purchasing power preservation. Benchmarking $UNIT’s performance against the CPI Index provides insights into purchasing power growth or stagnation.
Brave says that $UNIT serves as an alternative to stablecoins for hedging against inflation in native currencies.

Why choose $rETH to back $UNIT

Brave says that the decision to choose $rETH as a backing asset was driven by its existing yield potential and scalability due to widespread integration in DeFi platforms. Liquid Staking Tokens were preferred for their scalability in value growth over time and representation of network fee share. $ETH‘s extensive integration across DeFi platforms creates high competition for it, making LSTs a more scalable option for on-chain money.
He adds that using an LST like $rETH as backing ensures security for the network while aligning with decentralized values. Rocket Pool community’s dedication to decentralization makes it an ideal choice for securing on-chain decentralized money.

Will $UNIT support other collateral assets?

Ermin says that growing stablecoin market caps raise concerns about network security; assets settling on-chain should contribute to network security directly.
He adds that they are exploring potential addition of other LST tokens based on internal criteria; evaluating if $UNIT is capped by the total FDV of $ETH.

How to mint $UNIT

Brave says that when minting $UNITtokens with $ETH, there is a consideration of potentially obtaining a better rate compared to swapping through a DEX aggregator. By depositing $ETH to mint $UNIT tokens, one enters the protocol’s shared liquidity pool, receiving an equivalent amount of $UNITtokens and starting to earn yield from trading fees and other sources.
He adds that as a $UNIT holder, one benefits from earning various fees like trading fees, liquidation fees, and funding rate fee, contributing to the growth in value of the shared liquidity pool backing $UNITtokens.
Brave says that the initial value of one $UNITtoken was set at 1 $ETH but has since fluctuated based on market dynamics. Currently, 1 $UNITtoken is valued slightly above 1 $ETH.
He adds that despite market fluctuations, holding $UNIT tokens has led to stable or increasing dollar value over time due to more participants joining the platform and engaging in leverage trading activities.
Brave says that presently, there is no liquidity for $UNIT tokens in DEXs; however, future plans may introduce such liquidity. While there may be arbitrage opportunities between minted $UNIT and those obtained from DEXs if premiums exist, holding $UNIT tokens ensures their growth in value regardless of the acquisition method.

How $UNIT accrues yield

Brave says that the current APY for $UNIT is 34.5%, calculated monthly. $UNIT is a rebasing token where the amount stays constant, but the underlying value in the liquidity pool increases over time.
He adds that holding $UNIT results in an increase in asset value over time. Fees from professional Futures market activities contribute to increasing the value of $UNIT by adding to the liquidity pool.
Brave says that holding onto $UNIT over time leads to an increase in its value without needing active rebase actions. Potential future avenues for acquiring more $UNIT include airdrops or other methods as liquidity grows.

Not a CDP protocol

Brave says that, unlike a CDP-style protocol, $UNIT does not require over-collateralization or face liquidation risks. Users deposit any asset into $UNIT and receive an equivalent value of unit tokens without exposure to liquidation threats.
He adds that traditional stablecoin models involve complex mechanisms and risk management strategies. The simplicity of Flat Money eliminates the need for users to constantly manage positions against price fluctuations.
Brave says that two markets exist within the protocol: $UNIT holders providing liquidity on one side, while perpetual traders pay fees on the other side. The borrowing rate adjusts dynamically to attract capital where needed within each market.
He adds that DeFi enables a new world of trading and yield opportunities. Higher liquidity attracts more leverage traders, lowering borrowing rates.

Leveraged $rETH perps trading

Brave says that $UNIT holders can earn up to 34% APY by depositing and minting $UNIT. Leverage traders can borrow from $UNIT holders to gain leverage in the market.
He adds that $UNIT holders act as the counterparty in trades, providing collateral for leverage traders. Leverage traders can only go long in the market with Flat Money.
Brave says that the ideal delta-neutral flatcoin market has a skew close to 50%. User interface simplicity aids users in understanding market dynamics easily.
Brave says that stop losses and take profit features are available for risk management purposes.

Flat Money Points (FMP) Program

He adds that the Flat Money Points program rewards early participants with convertible points for tokens later on. Early depositors receive Flat Money points distributed over a vesting period. Leverage traders earn FMP based on their volume traded. Detailed distribution schedule outlined for transparency.
He adds that future seasons will introduce new ways to earn Flat Money points within the ecosystem.
Brave says that the only way to acquire Flat Money points is by being aligned with or utilizing the protocol. Other participation rates within the protocol will also allow users to earn points. Flat Money Points ($FMP) is not a governance token but a future utility token that users can stake. The token is expected to have value, offering opportunities for earning through protocol participation.

Risks

Brave says that $UNIT yield depends on leverage traders generating yield; fluctuations in funding rates impact $UNIT holder yields. Despite fluctuating funding rates, the Flat Money protocol ensures $UNIT holders do not pay to maintain positions but receive payments from leverage traders for handling fees and liquidations.
He adds that the Flat Money protocol offers advantages over other delta-neutral strategies like Ethena due to its on-chain nature and security measures such as thorough audits by Sherlock.
Brave emphasizes security with thorough audits by Sherlock ensuring confidence in smart contract integrity; and discussions around off-chain activities’ risks compared to on-chain protocols. He highlights past incidents like custodian issues and emphasizes the importance of transparency in DeFi projects; encouraging ongoing conversations about risks involved in decentralized finance.
He adds that safeguards include caps on open interest to prevent excessive borrowing beyond available liquidity. Market conditions influence $UNIT utilization over time; users can redeem $UNIT during high utilization periods or utilize DEXs for liquidity access when needed.
DeFi Dad says that Flat Money appeals to individuals desiring maximally censorship-resistant on-chain currency backed by premier collateral like reum while providing ample yield opportunities as a medium of exchange.

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Show Information

Medium: YouTube (Video)
Show: The Edge Podcast
Show Title: Flat Money: The First Flatcoin on Base
Show Date: May 18, 2024