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Basis Has Raised $133M on its Promise of a ‘Stableoin.’ Should We Buy the Hype?

By NexChange
Venture Capital, FinTech

When you read the white paper for Basis, a crypto startup based in Hoboken, New Jersey, you’ll come across a section that touts its potential to work as a solution in developing nations where people lack access to stable currencies. It notes that “in countries with weak institutions and unstable currencies” there also tends to be “high rates of inflation and currency devaluation” plaguing their financial markets.

“In these markets, we expect a price-stable cryptocurrency will be in high demand,” the paper states.

If this sounds familiar – the great promise of a cryptocurrency being able to offer the citizens in developing countries an alternative to their country’s devalued fiat currency – it should: While much of the news surrounding Bitcoin this year has been centered on its plummeting value – after it reached record highs in December – the world’s largest cryptocurrency by market capitalization has thrived in third-world countries, including Kenya, Sudan and Venezuela.

“Buying cryptocurrencies is seen as a protection by people who have been constantly disappointed by central banks and politics,” Arnaud Masset, an analyst at brokerage Swissquote, told the Wall Street Journal in January. “When conventional money fails, bitcoin wins.”

However, while the team at Basis acknowledges this role in third-world countries, it also argues in its white paper that “Bitcoin can never truly free people from their unstable local currencies due to its own lack of price stability.” Should Bitcoin be “going through a cycle of devaluation, users perceive no difference between it and a devaluing local currency,” according to the paper.

What Basis seems to be aiming for then is to be the anti-Bitcoin: Whereas Bitcoin’s price has swung between wild highs and anxiety inducing lows, Basis is trying to create a price-stable cryptocurrency pegged to “arbitrary assets or baskets of goods while remaining completely decentralized.” If price volatility is one of the biggest barriers to widespread adoption of cryptocurrencies – as Basis believes – then guaranteeing the purchasing power of your digital tokens would undoubtedly be a game-changer.

And while mass adoption might be years away – if it ever happens at all – some of tech’s biggest investors are already buying what Basis is selling. As TechCrunch reported in April, Basis has raised a “somewhat stunning” $133 million from a murderer’s row of tech investors that includes Stan Drunkenmiller, Lightspeed Venture Partners, Bain Capital Ventures, Andreessen Horowitz and even former Federal Reserve governor Kevin Warsh.

So, let’s take a look at Basis and separate hype from reality.

Who is Basis?

Basis is a 12-strong team that was founded by CEO Nader Al-Naji, Lawrence Diao and Josh Chen, who met as undergraduates at Princeton University. According to Al-Naji’s bio, he “became obsessed with bitcoin in 2012 and set up a mining rig in his dorm.” The company has been around for just over a year.

How Does it Work?

This is where things get a little murky and may raise some red flags about whether Basis is being overhyped by its A-List financial backers (more on that later). The bottom line is that it’s not entirely clear how Basis works just yet. But here’s what we do know:

  • The biggest selling point for Basis is that it wants to be a price-stable cryptocurrency. It will accomplish this by “algorithmically adjusting the supply of Basis tokens in response to changes in, for example, the Basis-USD exchange rate.” This means that it will essentially be “implementing an algorithmic central bank” so that it stabilizes Basis in a similar way that central banks do around the world.
  • Basis will utilize a three-token system: Basecoins, Base Bonds and Base Shares. Basecoins are pegged to the USD and used for a medium of exchange; Bond tokens are not pegged to anything and are auctioned off by the Basis blockchain when it needs to contract the Basis supply; and Share tokens have “a supply that is fixed at the genesis of the blockchain” and are also not pegged to anything. 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.”
  • Basis adheres to the Quantity Theory of Money – like the Federal Reserve – in which the general price of goods and services is directly proportional to the supply of money in circulation. For Basis this means its blockchain monitors price levels and adjusts the money supply accordingly by creating Basis or bond tokens.

Why Do Investors Love It?

So why has Basis attracted $133 million from so many high-profile investors? Well, because the promise of a stable-price cryptocurrency is basically the holy grail of the crypto world right now. But, of course, this has been tried before with (thus far) little success. The most well-known of these digital coins is Tether, created and sold by popular crypto exchange Bitfinex, which has lately come under intense scrutiny for allegedly manipulating the price of Bitcoin.

But Salil Deshpande, managing director at Bain Capital Ventures, which led the fundraising effort for Basis, explained in a blog post on Medium that Bain’s interest in the crypto upstart is centered around its confidence in the “algorithmic central bank” that is cornerstone of Basis’ strategy.

“[The] Basis team has developed the first software protocol that can automate the core function of a central bank in a decentralized and algorithmic way,” Deshpande writes. He adds: “We were impressed by the team’s vision, thoughtfulness and ability to execute, and participated in their seed investment alongside other blockchain investors.”

Is There a Reason to Be Skeptical?

It’s always good to maintain a healthy skepticism when it comes to a new financial venture, especially one in a volatile market like cryptocurrency. Writing for Ars Technica, reporter Timothy B. Lee notes that stablecoins have been attempted in the past – e.g. Tether – “with generally poor results.”

And based on the white paper, Lee is unconvinced that the “[Basis] team has figured out how to succeed where previous projects have failed.”

At a fundamental level, the problem with any of these unbacked stablecoin systems is that it’s hard to make sure that the demand for the non-stable asset (shares or bonds) is at least as robust as the stablecoin.

The value of bonds is driven by the likelihood of future money creation. At first, as the system is growing and more people are using the currency, this might not be a problem. But once the system matures, demand for money might slump, making bonds worthless. And then the system as a whole could become unstable.

So, is This Hype or is it Real?

Here’s the short, frustratingly non-answer answer: We just don’t know. As Lee points out, Basis hasn’t actually built out its network yet, which means all we have to go on is the company’s white paper – and as Lee also notes, that doesn’t really answer all the questions one may have about how this will work. And as TechCrunch’s Connie Loizos pointed out, Al-Najo, the CEO and co-founder of Basis, “continues to keep details close to the vest,” declining to tell Loizos in an interview when exactly Basis coins will be in circulation.

But it’s easy to see why the New Jersey-based company has attracted some serious money from some serious investors: Its “algorithmic central bank” does sound promising. While other companies have attempted stablecoins already, Basis is offering something that hasn’t been done and that – on paper (no pun intended) – actually sounds revolutionary.

As Deshpande pointed out, none of these other cryptos have solved the problems of counteryparty risk and volatility at the same time. Like with Tether, the counterparties are often “opaque offshore entities with unclear governance.”

More than anything, it’s probably not unreasonable to think that a lot of people want Basis – or something else like Basis – to succeed. The promise of someday having a stablecoin is enticing for anyone who cares about cryptocurrencies. And the fact that it has already raised $133 million at least tells us that Basis will end up with enough of a runway for us to find out if it can deliver on its promise.

It’s really simple: No matter how much hype follows the crypto market, at the end of the day the only way cryptocurrency will truly change the world and disrupt the global financial system is if we can actually use it to buy things. That’s what Basis is setting out to do – and what we’ll be watching to see if they successfully do it.

Photo: Getty iStock






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