QUADRIGA INITIATIVE
CRYPTO WATCHDOG & FRAUD RECOVERY PLATFORM
A COMMUNITY-BASED, NOT-FOR-PROFIT
$0 USD
DECEMBER 2018
UNITED STATES
BASECOIN
DESCRIPTION OF EVENTS
"A Robust, Price-Stable Cryptocurrency with an Algorithmic Central Bank" "The Basecoin project is backed by Andreessen Horowitz, Bain Capital Ventures, Libertus Capital, PolyChain Capital, Pantera Capital, Digital Currency Group, 1confirmation, and MetaStable Capital. The 3 founders have backgrounds from D. E. Shaw & Co. Quantitative Strategies, Google Search, Google Ads, and Princeton University, where they all graduated summa cum laude in Computer Science."
"Basecoin was a cryptocurrency launched in 2018 whose protocol was designed to keep its price stable." "Basecoin is a decentralized token, intended for day-to-day adoption and usability and designed with independent development. Its main objective is to be an alternative means of payment in companies and businesses, physical and online. And also for payment of bank slips, recharge for cell phone, phone bills, and other types of services. One of Basecoin's peculiar characteristics is to provide convenience, reliability, speed, and security when making your transactions."
“If you have a Basecoin, it’ll be worth $1 today; it’ll be worth $1 tomorrow; it’ll be worth $1 forever,” Intangible Labs CEO and co-founder Nader Al-Naji said.
"Volatility of cryptocurrencies has prevented their widespread adoption. We are trying to build cryptocurrencies that have all the benefits of crypto but is stable," he told Reuters in an interview last year.
"At launch, its value was pegged to the U.S. dollar. Basecoin was designed to help investors have a store of value that wasn't plagued by the wild fluctuations in price that most cryptocurrencies, such as Bitcoin, experience."
"Basecoin was founded by Nader Al-Naji and his two former Princeton classmates Josh Chen and Lawrence Diao. Basecoin labeled its tokens as “stable,” meaning that the value could be pegged to another asset. These types of cryptocurrencies are called stablecoins, which were designed to reduce the high price fluctuations—called volatility— that many cryptocurrencies experience."
"A single Basecoin could be pegged to the U.S. dollar (USD), a basket of assets, or an index, such as the Consumer Price Index (CPI). CPI measures the price increases for a basket of consumer goods and is an indicator of rising prices—called inflation—in an economy. At launch, it used the U.S. dollar as a peg. The company claimed that it algorithmically adjusted the supply of its tokens based on the exchange rate between it and the peg. For example, one BASE would always be worth one U.S. dollar."
"Suppose the value of a token rises above one dollar. In that case, Basecoin will transfer additional tickets to holders of Base Shares to make up for the difference. Holders of Base Shares will be permitted to sell their shares, rather than the general public being offered the opportunity to buy them."
"The purpose of taking this step was to increase overall supply until the value of one Basecoin equals the value of one US dollar (USD)."
"The Basis mechanism is designed to be resistant to death spirals and positive feedback loops. Our stability analysis, which we plan to make public, explores this question from many angles. Here, we discuss what we find to be one of the most common misconceptions around the way we believe the Basis system would work in a crisis of confidence."
"Suppose the value of a token falls below the value of a dollar. Since it was a first-come, first-served basis for the conversion, it will permit early investors to receive their payouts before late investors."
"The protocol is designed such that when a crisis of confidence occurs, once bond prices drop below a threshold that we call the bond price floor, the protocol would simply stop creating new bonds. When this happens, we would expect Basis price to dip below $1 for a period of time because demand has dropped but bonds are no longer being created. However, having a bond expiration means that old bonds gradually expire. When old bonds expire, the bond queue gets shorter. At some point, and usually quite rapidly, we would expect the shorter bond queue to cause bond prices to rise above the floor again, helping to restore Basis price back to $1."
"Their algorithm relies on three classes of tokens:"
"Basecoins, the tokens of the system intended to function as currency;"
"Base Bonds (which seem to resemble a binary call option more than a bond), which feature a 5 year expiration period and are auctioned off to contract the money supply (we’ll use “money supply” and “coin supply” interchangeably here), redeemable when the algorithm determines that a supply-expansion is in order; and"
"Base Shares, which have fixed-supply and pay out dividends after all Base bonds have been paid off."
"To contract the money supply, the blockchain issues and sells Base bonds to take Basecoin out of supply. These bonds pay out one Basecoin at expiration and generally sell for less than one Basecoin, which the whitepaper claims will incentivize holders to lock up their Basecoins for a period of time. This continuous “open auction system” allows holders to specify orders (i.e., 100 Base bonds at 0.9 Basecoins per bond). When the money supply needs to be contracted, orders with the highest bids will be prioritized (with the lowest bids having their bids partially fulfilled), and fulfillment continues until a certain amount of supply has been sufficiently eliminated. The protocol sets a floor for the price of the bonds (0.10 Basecoins in the whitepaper)."
"To expand the money supply, the blockchain creates N new coins and pays out bondholders in first-in-first-out order (kind of like how pyramid schemes pay their investors; bonds are typically paid out pro rata, or proportionally) distributing any remaining new coins to shareholders (prioritizing debt-holders over shareholders, as is typical)."
"This is a very interesting concept, no doubt. However, a decent amount of problems arise. First, people will only buy these bonds in the if they expect the currency that they’re denominated in to retain its value — and for Basecoin to retain its value, people need to buy these bonds in the first place. Basecoin doesn’t say how it will handle currency risk for investors and holders; one can imagine the following scenario in a currency area based on Basecoin:"
"1)Basecoin sinks below its 1 USD peg to, say, 0.75 USD. Protocol calls for a decrease in the money supply."
"2)The blockchain issues new Base bonds in an attempt to take Basecoin out of circulation."
"3)Investors, fearing further devaluation, demand extremely high yields on these new bonds, and bids approach the floor set by the protocol. Assuming interest rates are influenced by the yield on these bonds (a fact that is interestingly mentioned nowhere in the whitepaper, even though these Base bonds are basically presented as virtual Treasury bonds), borrowing costs would skyrocket in the currency area. Basecoin mentions 0.10 USD as a floor price on these bonds, which would effectively mean an interest rate of 90 percent (the Blockchain is “borrowing” 10 cents and returning a full dollar) — imagine if the risk-free Treasury rate was 90 percent!"
"4)Severely higher borrowing costs mean severely stunted growth — investor’s confidence in the currency area declines further, demand for Basecoin contracts even more, and continuous devaluation results. There is no mechanism in the algorithm to prevent such a loss of trust; no matter how much supply is contracted, the loss of faith in Basecoin could lead to a “devaluation spiral,” which would likely be associated with high inflation as well. If truly decentralized, there would be no central bank to step in and take necessary measures outside the scope of the protocol."
"The great Economist, Cochrane explains that central banks frequently regulate the money supply by purchasing and selling financial instruments. A significant bank purchases assets from financial institutions such as banks and other financial institutions to increase the amount of money in circulation. It does not issue its securities; instead, it licences them from third parties."
"Basecoin, on the other hand, created a system in which Base Bonds covered price drops. It had no value because they were supposed to be as liquid as Base Shares and the coin itself, and hence had no value. Based on Cochrane's predictions, bitcoin buyers will quickly discover that bonds cannot pay more interest than money in a liquid market."
As Chochrane said, "It is interesting to me how the cryptocurrency community seems to be painfully re-learning centuries-old lessons in monetary economics." "Though Basecoin tried to solve the crypto volatility problem by pegging the coin to an asset, the mechanism supporting the peg was purely self-referential (instead of having a true one-to-one relationship between the digital coin and hard currency reserves)."
"Basecoin was renamed Basis in 2018, following an announcement made at the time. While it was one of the most well-funded coins in that year, its prominence drew the attention of government regulators."
"After intervention by the U.S. Securities and Exchange Commission (SEC), Basecoin (renamed Basis) was shut down in December of 2018."
"According to the letter signed by the business's CEO, Nader Al-Naji, on December 13, 2018, the company will reimburse investors' money. It will phase down Basecoin over the following year. Al-Naji argues in the letter that Basecoin's method is unworkable in light of the Securities and Exchange Commission's (SEC) requirements to "impose transfer restrictions on bond and share tokens"."
"Unfortunately, having to apply US securities regulation to the system had a serious negative impact on our ability to launch Basis." "Due to their status as unregistered securities, bond and share tokens would be subject to transfer restrictions, with Intangible Labs responsible for limiting token ownership to accredited investors in the US for the first year after issuance and for performing eligibility checks on international users." "Enforcing transfer restrictions would require a centralized whitelist, meaning our system would not only lose its censorship resistance, but also that on-chain auctions would have significantly less liquidity."
"We considered many alternative paths to launch to try and comply with the regulatory constraints while keeping our product compelling and competitive, including launching offshore, and starting off with a centralized stability mechanism. Ultimately, however, we don't think any of the paths we considered are compelling enough for our users or our investors, or consistent enough with our vision to justify moving forward."
Basecoin, later renamed Basis, was a stablecoin proposed by 3 individuals in Princeton university, and backed by a large number of venture capital firms. The protocol ultimately had to shut down as per the SEC regulations, and was never able to launch. All investor funds were reportedly returned.
@ABettaMeta Twitter (Jul 13)
https://coinmarketcap.com/currencies/basecoin/ (Nov 1)
Basecoin Definition (Nov 1)
The Grumpy Economist: Basecoin (Nov 1)
Basecoin (Nov 1)
Wayback Machine (Nov 1)
Introduction to Basecoin - Basecoin V/s Tether USDT | Analytics Steps (Nov 1)
https://medium.com/@dberry_11804/basecoin-an-overview-and-some-thoughts-ff8264b5b249 (Nov 1)
https://fortune.com/crypto/2017/10/16/cryptocurrency-basecoin-investment/ (Nov 1)
Intangible labs Grabs $133 Million From Big Investors Backing Basecoin | Finance Magnates (Nov 1)
Basis (Nov 1)
https://www.basis.io/article/could-a-crisis-of-confidence-cause (Nov 1)
