Basis

Like its many stablecoin peers, Basis has embarked upon its quest for the Holy Grail by seeking to differentiate itself by virtue of its novel approach and innovative ideas. From a rhetorical standpoint, Basis strongly succeeds, with an intelligent, readable and compellingly argued whitepaper that makes an appealing, if nevertheless ultimately unproven, case for the theoretical strength of its approach. Ambitiously describing itself as the ‘stable cryptocurrency with an algorithmic central bank’, Basis believes its specific approach to protocol-governed expansions and contractions of its monetary supply will allow it to emerge as a leading entrant in the field. The decision to refer to its own protocol-governed monetary policy as akin to ‘an algorithmic central bank’ is also a carefully chosen metaphor, indicative, as shall become clear, of a larger destiny Basis boldly suggests awaits it.

Overview

There are three components of the Basis ecosystem that together govern the system’s functioning:

  • Basis tokens represent the core stablecoin of the system, tradeable tokens that are intended to retain a value close to the designated peg.
  • Bond tokens, or simply bonds, are created during declines in the Basis token price, are purchased with Basis tokens in order to reduce token supply and increase the token price, and are redeemed upon the Basis tokens returning to and trading above par, at which point the algorithm would be interested in increasing the money supply in order to lower the price. Bond tokens are not tradeable, and after purchase must be held until redemption or expiration.
  • Share tokens represent a fixed supply token called Basis shares. When all outstanding bonds have been redeemed and the Basis token continues to trade over par, additional Basis tokens are issued to share token holders. These shares are not redeemed upon issuance of additional Basis tokens and can theoretically receive unlimited tokens as or if demand increases.  These are not intended to be tradeable on public exchanges.

These three elements of the Basis ecosystem are significant in that they both guide the system’s functioning and represent a novel attempt to address the fundamental challenge facing all stablecoins of the seigniorage shares genre. This is because, whereas seigniorage share protocols generally issue ‘shares’ redeemable for coins as prices drop below the designated peg, Basis has introduced a minor yet important modification by instead offering to sell Basis ‘bonds’. Basis considers itself different from the seigniorage shares group by virtue of this distinction that it considers a novel and critical component of its stabilisation and monetary policy techniques. Upon closer inspection this distinction is at the core of several innovations that might ultimately insulate Basis from many of the challenges facing other members of the seigniorage shares group.

Basis, née Basecoin, emerged in 2017, founded by three Princeton computer science graduates, Nader Al-Najo, Lawrence Diao, and Josh Chen. Following their graduation from Princeton, the three have worked in various tech, finance, and research firms. While Basecoin is reported to have found early-stage investment and support from a handful of leading venture capital firms during 2017, the project changed its name to Basis early in 2018, around the same time it completed a ~$133 million investment round with an extended group of top venture firms. Investors in this most recent round purchased not Basis stablecoins, but the underlying Basis Shares. As such, if or when Basis coins are trading above their peg, and assuming all outstanding bonds have been redeemed, new Basis coins will be issued to Basis shareholders, who are then free to sell them into the market. Should Basis’ market cap increase to some approximation of Tether’s early May 2018 valuation of $2+ billion, that entire amount in Basis coins will need to be issued. These will be issued to Basis shareholders who will in turn be free to resell them into the market in what could become a lucrative position as a supporter of what Basis founders and backers believe could assume a central role in the expansion of the crypto space into the world of traditional economies.