DEFINITION of Basecoin
Basecoin is a cryptocurrency whose protocol is designed to keep its price stable. Basecoin launched with its value pegged to the U.S. dollar.
BREAKING DOWN Basecoin
A single Basecoin can be pegged to the USD, a basket of assets, or an index, such as the Consumer Price Index (CPI). At launch, it used the U.S. dollar as a peg. The company claims that it can algorithmically adjust the supply of its tokens based on the exchange rate between it and the peg. This means, for example, that one BASE will always be worth one USD.
Basecoin is not the first company to claim to have a stable coin, as Bitshares attempted this with BitUSD in 2014. That venture was not successful. The central banks of developed countries abandoned one of the more famous currency pegs, the gold standard, because they were no longer able to maintain the peg. This occurred because there was a mismatch between what the market thought pegged currencies were worth and what the central banks said they were worth, and making up for this difference was eating through reserves.
The Basecoin protocol is decentralized, which makes it difficult to verify how the market is valuing its tokens. It has to rely on data provided by third parties, and will adjust the amount of tokens it issues based on how the market values them. It does this using three different tokens:
- Base Bonds
- Base Shares.
Base Shares are held by investors who bought into Basecoin early on, but are not the same as stocks. Base Bonds are not the same as bonds, and instead are more similar to an option or future.
If the value of a token is higher than a dollar, Basecoin releases more tokens to holders of Base Shares. It does not release them to the open market directly, and instead allows Base Share holders to sell the tokens. This roundabout approach is supposed to increase the overall supply until the value of one Basecoin returns to parity with the USD.
If the value of a token is lower than a dollar, Basecoin releases Base Bonds, which can be converted to into Basecoin once Basecoin reaches parity. This conversion is done on a first-come, first-serve basis, meaning that early investors are able to cash out before later ones.
Claims Of Stability Criticized
Basecoin’s claim that this three-pronged approach to managing token value is similar to how central banks operate has been met with skepticism. In some cases, the whitepaper outlining how Basecoin functions confuses fiscal policy with monetary policy.
Central banks typically manage the supply of money by buying and selling securities. If a central bank wants to increase the quantity of money in circulation, it buys securities from banks and other financial institutions. It does not create its own securities.
The success of Basecoin’s three-pronged approach is highly dependent on how much investors trust the company. This is because the mechanisms – Basecoin, Base Shares, and Base Bonds – and their relative values are all controlled by Basecoin. Central banks do not issue their own bonds, as Basecoin does with Base Bonds, or rely on third-parties (holders of Base Shares) to manage supply.
In order to remain successful, Basecoin has to continuously attract investors who will exchange hard currency for the tokens of earlier Basecoin investors. This has been criticized as similar to a Ponzi scheme. (See also: Former Bitcoin Exchange Operator Arrested: SEC Charges Him With Fraud.)