Algorithmic stablecoin project Basis, which has been backed by some of the biggest names in the venture capital space, is rumored to have started the process of "winding down and returning funds to investors" due to regulatory concerns.
How Basis Got Started
As previously covered by CryptoGlobe, on 18 April 2018, a US-based cryptocurrency startup called Intangible Labs announced that it had raised $133 million in a private placement from big-name investors such as Bain Capital Ventures, GV (formerly, Google Ventures), Lightspeed Venture Partners, Andreessen Horowitz, and Pantera Capital. The company said that it was building a new price-stable cryptocurrency (called Basis, but formerly known as Basecoin) that eliminated volatility through the idea of an algorithmic central bank. The New Jersey based startup was founded by three former classmates at Princeton University: Nader Al-Naji, Lawrence Diao, and Josh Chen.
Most existing cryptocurrencies either have a fixed supply of tokens (like Bitcoin) or continuously expanding one (such as Ethereum). In contrast, Basis was designed to achieve price stability by having a supply that is expanding or contracting based on demand, in the same way that a central bank maintains stability by expanding or contracting the supply of money.
According to its white paper, Basis algorithmically adjusts the supply using the same economic principles used by central banks, the most important of which is the Quantity Theory of Money. When demand goes up, the blockchain will "create more Basis"; the expanded supply brings down the price of the tokens. When demand goes down, the blockchain will "buy back Basis"; the contracted supply brings up the price of the tokens.
In his article on Medium, co-founder Nader Al-Naji explained that the main motivation for creating a stablecoin, or price-stable cryptocurrency, came from the need for a stable currency in developing countries, which usually have unstable local currencies that can devalue by 10% or more per year and where massive hyperinflation is not uncommon. For example, in 2018, according to Bloomberg, the International Monetary Fund (IMF) is expecting the inflation rate of Venezuela to reach 13,000 percent.
Rumors About Basis Winding Down
One of the most trusted sources reporting these rumors is Su Zhu, Co-Founder, CIO, and CEO of Singapore-based hedge fund Three Arrows Capital, who sent out a series of tweets about Basis around 00:46 UTC on December 13th:
Rumors that @basisprotocol (Basecoin) is winding down and returning funds to investors. Basis raised 133mill & was the hyped algo stablecoin of the year. Backers included: a16z, Bain, DCG, MetaStable, Pantera, PolyChain, Lightspeed and Google Ventures. Let's go over red flags pic.twitter.com/emSv1oICDa— Su Zhu (@zhusu) December 13, 2018
1) CEO & Founder's bio says "he became obsessed with Bitcoin in 2012, and set up a mining rig in his dorm." Proof of OG is lowkey-CSW and easy to fake. It also has nothing to do with algo stablecoins. Why do we expect them to have deep insights on a new way to design money?— Su Zhu (@zhusu) December 13, 2018
2) Raised funds w/o a functional prototype / basic game theory stress testing. Any algo stablecoin generates a massive attack surface that is very difficult to reason through in a short amount of time. Instead of building a community and letting them poke holes, VCs FOMOed in.— Su Zhu (@zhusu) December 13, 2018
3) Mechanisms of the protocol itself are incredibly flawed. A succinct summary is below (written in April '18 w/ 93 claps on Medium).— Su Zhu (@zhusu) December 13, 2018
a) easily game-able, b) "bonds" concept is financially illiterate c) share/token holders are short volatilityhttps://t.co/Y44LHFXm6E
4) In light of the above, I hope the industry thinks more critically about what the shape of a good project is in this space. You can't just cobble together ex-bigtech/bankers, raise 9 figs, and then pop the champagne. More importantly I hope LPs ask their VCs harder questions.— Su Zhu (@zhusu) December 13, 2018
If the rumors are true (and we can't be sure yet since Intangible Labs has not officially confirmed any of them), the reason for the project winding down is regulatory pressure/concerns. One possible explanation for why Basis might be having regulatory issues is its concept of "bond" tokens, which was explained in the white paper.
The Basis protocol uses three types tokens for expanding and contracting the supply of the Basis stablecoin:
- Basis tokens: "These are the core tokens of the system. They are pegged to the USD and are intended to be used as a medium of exchange. Their supply is expanded and contracted in order to maintain the peg."
- Bond tokens: "Called bonds for short, these tokens are auctioned off by the blockchain when it needs to contract Basis supply. Bonds are not pegged to anything, and each bond promises the holder exactly 1 Basis at some point in the future under certain conditions. Since newly-created bonds are sold on open auction for prices of less than 1 Basis, you can expect to earn a competitive premium or 'yield' for your bond purchase."
- Share tokens: "Called shares for short, these are tokens whose supply is fixed at the genesis of the blockchain. They are not pegged to anything, and their value stems from their dividend policy. When demand for Basis goes up and the blockchain creates new Basis to match demand, shareholders receive these newly-created Basis pro rata so long as all outstanding bond tokens have been redeemed."
In particular, we need to look at how the contraction process works:
"Contraction works as follows. In order to destroy Basis, we must properly incentivize holders of Basis to lock up their Basis in exchange for future payoff. We do this by having the blockchain create and sell bond tokens. As discussed earlier, bond tokens are sold on open auction for prices that are generally less than 1 Basis. In return, they promise a future payout of 1 Basis when the system is expanding and when there are no older outstanding bonds, so long as the bond has not expired due to it having not been redeemed for 5 years."
The description of bond tokens in the white paper makes it sound as though the U.S. Securities and Exchange Commission (SEC) and/or the U.S. Commodity Futures Trading Commission (CFTC) might have some justification for viewing them as securities, which would make selling them on "open auction" potentially illegal.
We will update this article as the story develops.
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