Basis, a high profile stablecoin startup backed by marquee venture investors, is shutting down. According to a report in online publication The Block, the startup ran into “regulatory headwinds”. The exact nature of those headwinds and specific objections raised by regulators to Basis is not known. The Block reports that Basis will return raised capital to its investors.
Basis was launched last year by three Princeton grads. It raised $133 million investment money from the likes of Andreessen Horowitz and Bain Capital. While it was praised by Coindesk for pursuing the “crypto holy grail”, some called it an “economic dumpster fire.”
Investors in the startup told The Block that their “respect for this team is as high as it has ever been.” Their view was echoed on Twitter, where members of the crypto community praised the startup for making a difficult decision and choosing to shut down instead of “tilting at the windmills.”
How Did Basis Work?
In a CNBC appearance, Nader Al-Naji, Basis CEO, described their system as an “algorithmic central bank” and its stablecoin as a “digital dollar” that could be used in everyday transactions. “We are taking learnings of traditional monetary policy and bringing them into the crypto space,” he said.
The Basis team chose a complex algorithmic approach in designing their stablecoin system. There were three components to the stablecoin: Basecoin, Base Shares, and Base bonds. Basecoins were pegged on a 1:1 basis with the US dollar to ensure price stability. Base Shares were distributed to early investors in Basecoins while Base bonds functioned as a futures instrument.
Basis’s algorithm functioned in a manner similar to a central bank. It increased or decreased Basecoin supply each time the stablecoin’s price with respect to the US dollar varied significantly. In cases when the price increased, the algorithm boosted supply of Basecoins in the market to bring it back in line with the peg.
But the new coins were not released into the open markets. Instead they would have been passed onto holders of Base Shares, who would then resell them as tokens in cryptocurrency markets.
If the price of Basecoin decreased, then the algorithm would convert Basecoins into Basebonds, which were zero coupon bonds sold for a price of less than the price of 1 Basecoin. The bonds could be redeemed when Basecoin’s price reached parity with the peg. Redemption occurred on a first-come, first-serve basis, allowing early investors to cash out before others.
Critics of Basis said the system proposed by the startup was recursive because all three assets proposed were dependent on the price of Basecoins, which were not backed by any asset or taxes. Instead the only promise offered was printing of more Basecoins to stabilize prices They also pointed to the fact that the shareholders and bondholders for Basis were only incentivized to bet on an increase in the coin’s price.