Coinbase explores creating an inflation-pegged stablecoin by tracking inflation data

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Coinbase suggests inflation-pegged “flatcoins” as one of four key areas of innovations to be built on Layer 2 Basenetwork.

What: Coinbase is calling for developers to work on a flatcoin that will be pegged to the ‘price of living’ instead of fiat.

Why: The exchange lists this and three other ideas as ways to help the on-chain economy grow.

What Next: The ideas which will be built on Base aim at securing DeFi ecosystems and increasing confidence and trust in on-chain trade.

About a month after launching Base, Coinbase, one of the leading crypto exchanges, plans on developing a “flatcoin” as one of the major ideas for the Ethereum Layer 2 network.

A flatcoin is a stablecoin that is pegged to the rate of inflation in the traditional financial system and is viewed by the companies that develop them as a solution to inflation.

Coinbase revealed this idea and three others in a post which was a call to builders interested in taking part in these projects. The other three ideas were an on-chain reputation system, an on-chain limit order book (LOB) exchange, and tools to enhance safety in the decentralized finance (DeFi) ecosystem.

Are you a builder passionate about making the onchain economy grow, but looking for where to start?

We just published a Request for Builders: four areas we’d love to see builders explore on Base (with funding from the Base Ecosystem Fund) 🧵https://t.co/XSSdPnusyc

— Base 🛡️ (@base) March 24, 2023

In the post, Coinbase termed the ideas to be “critical” to the growth of the on-chain economy starting with the development of an inflation-pegged flatcoin. The exchange said:

“[We] are particularly interested in ‘flatcoins’ – stablecoins that track the rate of inflation, enabling users to have stability in purchasing power while also having resiliency from the economic uncertainty caused by the legacy financial system.”

Coinbase also welcomed ideas on any other stablecoins that were not pegged to fiat currencies but instead were geared towards bridging the gap between fiat-pegged coins and volatile crypto assets.

The latest interest shown by the exchange is fairly unusual but not new given that the majority of stablecoins are tied to the U.S. dollar [USD] or another fiat currency. Flatcoins from Coinbase, like other flatcoins, aim to be supported by the “cost of living” by tracking the consumer price index and inflation data.

This is a similar principle to the one behind Laguna Lab’s, Nuon flatcoin which is the world’s first flatcoin. Interestingly, the firm attributed its conception to discussions and Twitter threads from Coinbase CEO Brian Armstrong and ex-Coinbase CTO Balaji S. Srinivasan.

If you try to implement a flatcoin yourself — a non-fiat coin whose exchange rate remains flat against a basket of N goods — you immediately find that you need reserves to maintain that peg across N order books.

So, where do these reserves come from?https://t.co/mMoPnhxtm0

— Balaji (@balajis) September 4, 2021

Coinbase Proposes A Reputation Protocol To Establish On-chain Trust

Aside from flatcoins, the largest cryptocurrency exchange in the US also proposed an on-chain reputation that would aid in enhancing on-chain trust.

According to Coinbase’s description, the reputation protocol would put in place a ranking of sorts or a score based on certain criteria that would speak on behalf of an entity while interacting on-chain. Coinbase said, “This could look like a FICO or Google page rank type score on ENS names, ratings/reviews for merchants, and other measures that help build trust on-chain, “ adding that it was also important to maintain autonomy and user privacy.

To that end, the exchange called upon teams with interest and thoughts along that line to get in touch.

Coinbase listed an on-chain Limit Order Book (LOB) Exchange as the third idea. A LOB will make it possible to have the throughput required for a more advanced exchange while simultaneously reducing counterparty risk through self-custody, says Coinbase

“The high throughput of Base opens up significant new opportunities for designing new mechanisms for spot trading, limit orders, options, perpetuals, and more. And, builders can use open source tooling like OP Stack to build L3s that give them even more speed and control, potentially enabling even deeper liquidity, still accessible through L2, ” said Coinbase as it aimed to bring the familiarity of the traditional financial system on-chain through introducing limit orders.

Lastly, Coinbase placed creating a safer DeFi ecosystem on its list of priority projects on Base. The exchange recommended that developers should build tools to further secure users’ funds on the DeFi ecosystem even as it continues to grow.

Coinbase categorized the tools into three beginning with tools that can protect against protocol logic errors or smart contract code vulnerabilities. Of this kind, the tools would offer auditing services while testing for self-service security.

Additionally, there would be mitigating tools such as threat prevention, circuit breakers, and incident response systems that would aid in reducing the effect of attacks made on the DeFi ecosystem.

Finally, Coinbase proposed on-chain insurance and cover protocol that could serve as a safety net for users in the event that a smart contract fails.

According to Coinbase, all these ideas would be developed on Base, an Ethereum Layer 2 network that is supported by the Layer 2 network Optimism, by willing builders who are encouraged to reach out to the firm.