In 2018, a cryptocurrency called Basecoin was introduced with the promise of less price volatility via a fixed relationship with a base asset. The idea was panned by crypto fans and economists because it fundamentally misinterpreted how money value is maintained.
What Is Basecoin?
Launched in 2018, Basecoin is a cryptocurrency with a technology optimized for price stability. At its inception, its value was set to be equal to the dollar. Basecoin was created to provide investors with a stable value that is not subject to the erratic price swings seen in other cryptocurrencies. The U.S. Securities and Exchange Commission (SEC) forced the closure of Basecoin (renamed Basis) in December of 2018.
How Basecoin works?
Nader Al-Naji, together with two of his Princeton University classmates, Josh Chen and Lawrence Diao, released Basecoin, a stablecoin. Tokens issued by the corporation were advertised as “stable,” having their value tethered to the US dollar, a fixed asset basket, or an index such as the Consumer Price Index (CPI).
Tokens were first issued at a 1:1 ratio to the US dollar, with the promise that token supply will be dynamically adjusted depending on market conditions. Verifying market prices in Basecoin was difficult because of the protocol’s decentralization.
Three separate tokens were utilised in the system: Basecoin, Base Bonds, and Base Shares; the latter were owned by early investors but were not technically stocks. In the event that the value of a token increased above $1, Basecoin would increase supply by issuing tokens to holders of Base Shares, and in the event that the value of a token decreased below $1, Basecoin would issue Base Bonds that could be converted to Basecoin once parity with the underlying asset was reached.
What are Common Concerns about Baseoin?
Many people were skeptical of Basecoin’s assertion that its three-pronged method of controlling token value is analogous to the way central banks work.
Cochrane argues that the primary method by which central banks regulate the money supply is via the purchase and sale of various assets. To raise the amount of currency in circulation, central banks may often purchase assets from other financial institutions. They do not issue their own securities in-house.
Several economists, including Grumpy Economist’s John Cochrane, have criticized the economic reasoning behind Basecoin. The Basecoin whitepaper, which explains the cryptocurrency’s inner workings, has significant fundamental errors in its treatment of fiscal policy and monetary policy.
Basecoin, on the other hand, made Base Bonds worthless since they were designed to be as easily traded as Base Shares and the coin itself, rendering them useless in the event of a collapse in the Basecoin price. Basecoin purchasers will soon learn the lesson that bonds cannot pay more interest than money in a liquid market, and that claims to future seigniorage cannot back money in the face of rival currencies, as stated by Cochrane.
Basecoin attempted to address the issue of crypto volatility by pegging the coin to an asset; however, the mechanism behind the peg was entirely circular instead of having a true one-to-one relationship between the digital coin and hard currency reserves.