Cryptocurrency exchange Coinbase sees inflation-pegged “flat coins” as one of four “key” innovations that should be built on top of its recently launched layer 2 network Base.
The other three include an on-chain reputation system, an on-chain capped order book (LOB) exchange, and tools to make the decentralized finance (DeFi) ecosystem safer. The trading platform outlined the four areas in a post published on March 24, about a month after Coinbase launched Base, a network secured by ethereum and powered by other layer 2 network Optimism.
The first is the development of flat coins pegged to inflation. In light of the recent banking crisis, Coinbase said it is now "more important than ever" to build an inflation-tracking stablecoin to negate poor central bank monetary policy decisions: "[We] are particularly interested in 'flat coins' stablecoins that track inflation and allow users to stabilize purchasing power while also insuring against the economic uncertainty created by legacy financial systems."
While most stablecoins are pegged to a reference asset such as the U.S. dollar, flatcoins are designed to be pegged to the "price of living" by tracking consumer price index and inflation data.
Coinbase added that it is also open to other ideas “to fill the space between fiat-pegged stablecoins and volatile cryptocurrencies.” The concept has also been endorsed by investor Ray Dalio, who recently said he would like to see an "inflation-linked token" to ensure consumers can secure their purchasing power.
"The closest thing is inflation indexed bonds, but if you create a coin that says okay, here's the purchasing power, I know I can store money for a while and trade it anywhere, I think it will be a good one coins," he said. Coinbase also urged developers to consider developing an on-chain reputation system, which it said would play a "critical role" in building "on-chain trust" between users, according to Coinbase.
Reputation protocols can implement credit scoring or ranking-like systems to ensure certain criteria are met before on-chain identities can interact with decentralized finance (DeFi) applications: “This could look like a FICO or Google PageRank type score for the ENS name, ratings/reviews of the merchant, and other measures that help build trust on-chain.”
Ganesh Swami, CEO of blockchain data aggregator Covalent, previously told Cointelegraph that this could be done by looking at past transaction data for specific wallet addresses on rival protocols, as blockchains leave behind what he called “historical breadcrumbs.” .
However, Coinbase said that reputation protocols must ensure that user privacy and autonomy are preserved. In its third area of focus, Coinbase said an on-chain capped order book exchange could serve as a more "advanced exchange" because it can conduct normal exchange operations while eliminating counterparty risk through self-custody.
Limit orders are used to place an order to buy or sell a stock and limit the maximum (or minimum) price at which the user wants to trade. A limit order book is a list of orders for a given security. Coinbase explained that by adopting this on-chain technology, it could offer professional traders and institutions a new venue to execute trading strategies they are familiar with in the traditional financial system:
"Base's high throughput opens up important new opportunities for designing new mechanisms for spot trading, limit orders, options, perpetual contracts, etc. Moreover, builders can use open source tools like the OP Stack to build L3, thereby providing their Provides greater speed and control, making possible deeper mobility and still be accessible via L2." According to Coinbase, the final focus area is making the decentralized finance (DeFi) ecosystem safer for users and developers.
To achieve this feat, it hopes to enable tools that will prevent smart contract code bugs and protocol logic errors. Self-service security testing tools and more robust auditing services could help mitigate threat prevention, circuit breaker and incident response systems, the company explained.
Coinbase said it would also like to see more insurance protocols to provide users with “critical support” should smart contracts be exploited. Meanwhile, to help fast-track DeFi on Base, Coinbase launched the Base Ecosystem Fund to help fund early-stage projects built on Base. According to a recent article by Base, Layer 2 networks now support more than 30 blockchains.
