Hedging Against Inflation
Introducing Flatcoins: The First-ever Inflation-Resistant Stable Currency, an all in one!!
Many believe that “Blockchain is the next big revolution”. It sure is and over the past 15 years, it has been able to show a wonder every day. The ground-breaking arrival of Bitcoin in 2009 sent financial leaders scrambling to hatch a counter-strategy in their cocoons. With the onset of many cryptocurrencies leveraging the powers of Blockchain, none has developed into a widespread medium of exchange. Until the emergence of stablecoins, the pioneering and stabilised version of crypto for common transactions, backed by fiat currency.
Well, stablecoins exists now, what’s the problem? This ‘pioneering’ version of crypto now finds the strength in mimicking the fiat currency. Amidst with many flaws that have surfaced, stablecoins has also been exposed to the worst limitation: Inflation.
Uncomfortably, inflation has consumed every one of us! But how can we fight inflation? Is inflation, the public enemy No. 1? —Yes it is.
Inflation is simply, the rate of increase in prices over a given period of time. If a country is plagued by inflation, it might basically drain out every penny we have. To stabilise inflation, the government and central banks fight with the forces of fiscal and monetary policies such as increasing taxes, reducing spending, changing interest rates etc. The International Monetary Fund (IMF) predicted a decrease in the inflation rate to 4.1 percent by 2024, compared to the current analysis projecting a reduction to 5.8 percent in the same year.
Looks like inflation is here to stay!!
But Bruh.. What are Stablecoins?
Lets understand the basics first —
Stablecoins are cryptocurrencies pegged to the fiat currency, commodity, or financial instrument. These have a one-to-one relationship between a coin and an amount deposited either at a trust company, a bank or some other financial institution. The most widely traded stablecoin is USDC and USDT, where for every USDC coin, there’s an equal amount of dollar-backed assets or consumer-secure commercial paper on deposit at an institution.
Stablecoin solved the fundamental problem of the cryptocurrency ecosystem that existed a few years ago, which is - how do you get Fiat into the crypto ecosystem? Some believed that Bitcoin, Ethereum etc., will be the currency of the future. And hence there is no need to have Fiat currency any more. But at the end of the day, an average person like me, gets paid in Fiat. We transact in Fiat. With the volatile nature of Bitcoin and Ethereum, we needed a currency that is stable by nature. The stablecoins became the saviour to solve the problem of volatility in the cryptocurrency market.
Now there are three different types of stablecoin —
Fiat-based: Stablecoins are collateralized by a reserve of fiat currency. Although stablecoin can be traded on decentralized systems, backed with reserves or issued by centralized entity like a bank, financial institution.
Crypto collateralization: Stablecoins are backed by cryptocurrencies. This approach would technically fall under decentralized backed stablecoin, but possesses few risks with it.
Algorithmic: These are implemented with complex algorithms that combine the process of token issuance, burning the token and overcollateralization to maintain the peg.
But… How were they better than Fiat?
Let me give you some pointers —
Permissionless Transferability: As stablecoins are issued on blockchain, it has unique power over fiat by transferring and exchanging peer-to-peer (P2P) without the need for central intermediary. This enables us to process payments – faster, cheaper and more efficiently across local and international markets along with eliminating associated fees, restrictions, and delays.
Transparency: The core feature of a blockchain is transparency. Stablecoins issued on blockchains will enable anyone to view public data of stablecoin, like total supply, transaction activity, in real-time and historical transactions. This can be helpful in cases of illegal or unethical activities or potential fraudulent. FTX is one of the examples where the public identified discrepancies between statements made by the CEO of FTX and the movement of funds from relevant wallets.
Access to Financial Service: Stablecoins offers financial services to unbanked and underbanked through non-custodial wallets (permissionless software applications to store, send or receive digital assets). - individual participation in the global economy.
Base-Currency for Crypto Exchanges: In the early stages of cryptocurrency, stablecoins were preferred by investors to buy and sell other cryptocurrencies, reducing the fluctuations in price and costs associated with conversion. - increased liquidity to the crypto market.
Stablecoins seem boring but they have utility, right?
True, but stablecoins are not perfect. Even though, they solve fundamental problems of cryptocurrency market, they come with fundamental flaws as well.
Management of Reserve Funds: The basic principle of stablecoin heavily depends on the ability of the issuer to maintain a proper reserve of assets. If the issuer fails to maintain the asset in the reserve to back the stablecoin, it may lose stability. Also, if the issuer mismanages with reserves or there is lack of transparency about the reserves, it would be mistrust in the stablecoin.
Win-Lose Situation: The holders of stablecoin are left to bear the risk without any opportunity to share in the potential rewards. The issuers have an opportunity to invest billions in their reserves, without any input and keeping the return for themselves. Although this is a business opportunity for issuers, it creates a risker investment scenario, and lacks transparency with the information about those investments.
And the worst — Inflation Risk: As stablecoins are pegged to one US Dollar ($1), exposed to the same inflationary pressures as the US Dollar. If the US Dollar experiences inflation or decline in value, not only does the US Dollar lose purchasing power, stablecoins do as well. Should stablecoins be a store of value?
Okay hold up… What can we do now?
We have Flatcoins now —
What if there was a stablecoin that directed the returns generated from its reserves back into its token’s value, rather than pocketing the money for themselves?
A stablecoin pegged NOT to the USD but to the value of an underlying basket of financial assets (commodities, bonds, and equity). Of course — it’s value will grow over time. This currency’s priority is to beat inflation.
Sounds interesting? -- It’s the International Stable currency (ISC) — A Flatcoin.
The composition (called ISC Reserves) of the financial assets can be adjusted via ISC Decentralised Autonomous Organisation (DAO), where it allows the community to monitor crucial checks and balance of any changes. Thus, ISC emerges as a unique, forward-thinking solution to create a currency that is permissionless, asset-pegged, can beat inflation, and is controlled by a community. But how exactly does ISC achieve these remarkable features? Let’s investigate —
The value of ISC depends on the value of assets held by ISC Reserves. If the Reserves generate higher returns, it increases the price of ISC coin!
Some Analytics:
ISC has demonstrated the results of a back testing analysis of this concept comparing ISC against top fiat currencies, with a focus on its purchasing power from 1999 to 2023.
The above line graph represents the value of a basket of currencies against Special Drawing Rights (SDR). The graph represents the performance of the ISC compared to that of traditional fiat currencies in terms of SDR value.
The SDR is an international type of monetary reserve currency created by the International Monetary Fund (IMF) and is based on a basket of international currencies.
Notably, the USD/SDR line is slightly volatile in terms of SDR value, and the downward trend reflects the long-term inflation or could possibly be changes in global exchange rates. The ISC has significantly displayed strong performance and outperformed the top fiat currencies over the time period.
Inflation Resistance
As ISC is backed with the asset return in its Reserves, it gains edge to beat inflation within the stablecoin market. In contrast, USD collateralized stablecoins, loses value over a period of time, when the supply increases (money printing).
Community Governed Reserve System
The ISC reserve-system operates under community control, governed by its proprietary token, $INTL. This empowers community members with voting and oversight authority, ensuring community interests to remain paramount in the management of the ISC Reserves.
While the initial allocation of these reserves is determined by ISC founders, the reign is swiftly handed over to the community. Through collaborative decision-making and voting on proposals, members of the community can actively participate in enhancing the stability and quality of the ISC Reserves’ investments. — sustainable and responsible.
ISC Reserves
The ISC Reserve embodies a bold vision – a vision where stability is not just a lofty ideal but a tangible reality, where the ISC currency competes with the US Dollar.
To achieve this vision, ISC sets a guide of principles:
Prioritizing Stability
Community-driven Governance
Optimize Returns
But how does it steer clear of the hidden reefs of risk and uncertainty? The answer lies in the art of diversification – an old strategy of investing.
Passive Diversification
In financial markets, ‘uncertainty’ is natural. ISC reserve-system allocation strategy does not depend on anticipating future economic conditions. Instead, the ISC reserves system adopts a strategy of diversification – which could spread risk across a spectrum of asset classes.
Passive management
A style of management that delivers better returns with low-cost approach, passively. Through index-based investing, the ISC Reserve prioritizes broad diversification and minimal fees, maximizing the potential for sustainable, long-term returns.
ISC does emphasize that it doesn’t stop anyone from proposing changes to the allocation. Community can submit and vote on proposals aimed at improving the ISC Reserves stability.
It ensures to allocate its reserves to a broader financial market, thereby tracking its performance. The initial proposal for target of allocation:
Equity, Global – 20%
Commodity, Gold – 20%
Bonds, Global Bonds – 20%
Bonds, Short-Term Treasuries – 20%
Cash – 20%
Key Entities
ISC Issuer: Which is operated by the ISC Foundation. It has two major responsibilities: firstly, minting and burning of ISC tokens and managing loans of ISC between itself and the ISC Reserves.
ISC Reserves: It holds full ownership of assets where ISC users do not have direct ownership rights over these assets. Although ISC is pegged to the value of the assets owned by the ISC Reserves, ISC does not have direct ownership rights over these assets. Each reserve is responsible for providing liquidity of ISC to the market and buy & sell assets from the real-world asset market.
Real World Asset Market: It refers to the entire market for real & financial assets, including bonds, equities, commodities and more.
Digital Asset Market: It encompasses the buying and selling of cryptocurrencies, including the transactions of ISC tokens in centralized and decentralized exchanges.
Four Key Concepts for Sustainable Allocation Assets in Reserves
ISC Reserve Basket: Specific quantities of each asset requires to back 1 ISC token at the current day (Tn). — outlining the composition of assets that support the value of ISC.
ISC Target Price: Total value of the ISC Reserve Basket at the present day (Tn), is calculated by multiplying the price (p) of each asset by its quantity (q) in the basket.
ISC Reserve Basket Daily Rebalance: Implemented on the following day (Tn+1), adjustments are made based on the closing ISC Target Price (Tn) and the selected traded price which is — the volume-Weighted Average price (VWAP) at Tn+1.
For example,
If the VWAP of Asset A at Tn+1 > the price used to calculate the ISC Target Price at Tn,
Adjustments to reduce the quantity of Asset A are made, in the Reserve Basket to align with new price levels. Similarly, for VWAP of Asset B or C < ISC Target Price at Tn.
Sounds amazing… but how does it work?
Let’s discuss the Mechanics of each component serving to maintain stability and liquidity —
ISC Issuer: Coordinating ISC Loans
Think of ISC issuer as the conductor of a symphony; tasked with issuing and recalling ISC Loans to the ISC Reserves. These loans are not arbitrary; their sizes depends on factors like liquidity and price of ISC to the reliability of the ISC Reserves itself.
ISC Reserves: Fueling Digital Asset Market Liquidity
ISC Reserves continuously provide liquidity for ISC by facilitating buying and selling operations. As ISC flows in and out of the market, the cash generated from each transaction fuels the implementation of the ISC Reserve Basket — ensuring that users have the liquidity they need, to engage in ISC transactions with ease.
ISC Reserves: Bridging Real World Asset Market
It seamlessly interface with the Real Word Asset Market, navigating to procure and liquidate the assets required to maintain the ISC Reserve Basket. With each transaction, ISC Reserve upholds the ISC Target Price — ensuring that ecosystem remains with stability and reliability.
ISC Peg Mechanism — to stabilize the value of ISC in relation to a “Target Price”
Case A — High Market Price: If the market price of ISC exceeds the target price, the mechanism to bring the price down involves the ISC issuer providing more ISC to the reserves (increasing supply). These reserves then sell out ISC in DeFi (digital markets), which theoretically lowers the price back to the target.
Case B — Low Market Price: Conversely, if the market price is below the target price, the ISC issuer recalls ISC loans from the reserves (decreasing supply). The reserves must purchase ISC from the market to repay these loans, which could increase the price of ISC token due to reduced supply.
Continuous Rebalancing
This process is initiated to adjust the composition of the reserve basket that backs ISC. Rebalancing is the key process to maintain the value and stability of ISC token.
Incentive Structure
The reserve is incentivized to operate efficiently through a mechanism where its holdings are slightly reduced daily at an annual rate of 0.5%. It covers operational costs and transaction fees. The community can adjust the incentive structure to ensure it remains effective and fair.
ISC Issuer Interest Rate
To fund the project long-term, an interest rate is charged on loans of ISC issued to the reserves. This rate can vary between 0.0% to 1.0%. By charging interest, the project avoids the need to generate funding through the sale of additional governance tokens (INTL), which would dilute the existing supply. — ensuring the supply of INTL doesn't inflate, preserving its value.
The ISC project emphasizes the necessity of ensuring integrity and security of the funds held within its reserves, especially in light of past issues in cryptocurrency industry like the FTX collapse. To maintain trust and transparency, the project has committed to having its ISC Reserves regularly audited by an independent auditor.
The auditor is chosen democratically through a Decentralized Autonomous Organization (DAO) model, which allows the ISC token holders to vote on the selection.
The auditor is empowered to inspect the assets held by the reserves and is tasked with reporting their findings to the ISC community, particularly verifying the status of the reserves' funds.
These audits are mandatory on a quarterly basis, and all ISC Reserves are required to comply.
Additionally, the ISC Issuer retains the right to recall ISC loans at any time, which serves as a mechanism for direct oversight — ensuring that the reserves are operated responsibly, with potential for loan recall acting as a check against any malpractice.
ISC DAO Governance with $INTL Token
Governance Model and Mechanics
The ISC project has integrated a hybrid model that combines centralized expertise with decentralized governance. A Council, consisting of specialists and initial ISC team members, is entrusted to draft and propose initiatives, utilizing their expertise to ensure strategic alignment. Proposals are created by the Council and automatically pass unless actively vetoed by the DAO, maintaining a balance between informed leadership and community control. This vetting process is facilitated through the DAO's oversight — guaranteeing that all decisions reflect collective will of ISC community.
Tokenomics of $INTL
$INTL's fixed supply is set at 1 billion tokens, designed to enable community participation in governance and to fund the project's infrastructure and growth. Of this, 40% is allocated to community incentives and grants to encourage development within the ISC ecosystem, with DAO’s approval required for grant distribution. Another 40% is dedicated to ISC Labs and an Insurance Fund to ensure project sustainability and user fund protection. The remaining 20% is reserved for core contributors, with a five-year unlock period to promote long-term investment and decision-making.
Economically, 30% of the ISC Issuer's revenue from interest on ISC loans to ISC Reserves is used to buy back and burn $INTL, aligning the interests of $ISC & $INTL holders — incentivizing decisions that enhance ISC's long-term market capitalization and stability.
The Airdrop
ISC is set to distribute frozen INTL tokens via airdrop as a preliminary hype-building measure before the official launch of INTL through fundraising events like a private sale or ICO. These tokens will remain inactive until the launch. Additionally, the airdrop rate for ISC holders will decrease from 5 million to 1 million INTL per month after July 2023, with further reductions anticipated within the year.
The strategy behind is to reward ISC holders while also encouraging active participation in ISC-affiliated protocols such as Orca liquidity pools, Solend lending pools, and the Bucket stablecoin on Sui, with ongoing adjustments to airdrops —planned to foster behaviours beneficial to ISC's growth.
Current Performance of ISC
The ISC is currently priced at $1.6464, which represents a +6.77% Annual percentage Yield (APY) from the launch price. The supply remains pretty stable from the last month’s figure. The 7.81% growth in token holders shows an attraction of more holders. Overall, it indicates stable price with a slight increase in the number of holders, which is a positive sign.
What do you think??
ISC is an emerging stablecoin resisting inflation and promoting stability. I’m excited on the evolving nature and mechanism of its governance ISC Reserves. How it will potentially expand it position as rewarding flat coin in the cryptocurrency ecosystem!
‘ISC sees a need to be available on other blockchains (cross-chain) to gain broader adoption in the ecosystem’ — It emphasizes that ISC token is designed to bridge natively, rather than as “wrapped” or bridged version token.
This is great because, it reduces the risk of hacks when bridging the tokens, due to vulnerabilities in smart contracts.
The outlook on stablecoin looks very promising with new mechanisms and different approaches in backing up and maintaining stablecoin currency. The flatcoin like ISC is the next big thing offering solutions with a simpler mechanism!!
References
https://www.investopedia.com/what-went-wrong-with-ftx-6828447
https://www.investopedia.com/terms/s/sdr.asp#:~:text=Special%20drawing%20rights%20(SDR)%20refer,money%20reserves%20of%20member%20countries.
https://dashboard.isc.money/
https://wp.isc.money/
https://x.com/ISC_mone
https://medium.com/@ISC_money/upcoming-updates-or-why-you-should-talk-to-users-c6a41588ccd9