The emergence of Basis Cash has given the outside world a different definition of stable currency. Through the elastic supply adjustment mechanism, Basis utilizes the Basis Cash (BAC), Basis Bond (BAB) and Basis Share (BAS) in the system, relying on the dual power of the market and the algorithm, to keep the BAC stable at about $1.
IOSG Ventures, a venture capital firm in the crypto industry, has made a vivid analogy, which regards BAC, BAB, and BAS as the U.S. dollar, U.S. dollar Treasury bonds and Fed stocks respectively.
Theoretically, if the BAC is higher than $1, the system will issue a certain amount of BAC through the algorithm to stabilize the currency asset price, and BAS holders can get BAC dividends; when the BAC is less than $1, users can buy BAB at a low price with BAC (Bond bonds) gain arbitrage space and destroy BAC at the same time, forming a deflationary effect to promote the rebound of currency prices.
Compared with USDT and DAI, Basis’s model not only guarantees decentralization, but also does not require asset collateral. It wants to take advantage of human profitability and use the market and algorithms to mint stable coins.
It is regarded by many people in the industry as a currency reform, but there are also other arguments that the three exercise tokens in the algorithmic stable currency do not have full redemption rights and profit support, and are completely dependent on the capital investment of later generations. , With Ponzi color.
An even more comical scene is that the search for a stable currency price with algorithms is often due to human greed or fear, which leads to instability of stable currency. It is either anchored above 1 US dollar, or if it falls, it cannot rise to 1 US dollar. After Basis became popular, a series of “imitations” quickly appeared in the algorithmic stable currency sector. Some projects were suspected of being cashed out by the development team, and no one paid any attention after the currency price fell below $1.
Algorithmic stablecoins also showed two sides of the coin, and were engulfed by cheers and doubts. Under the surface of popularity, whether the algorithmic stablecoin can enter the room or not will need to continue to experiment to get the result.
Basis Explosive Algorithm Stable Coin Sets New DeFi Trend
DeFi, which was originally stolen by the skyrocketing mainstream crypto assets, has faintly begun to gain momentum recently, but the leader is no longer Uniswap, Compound and other “Old DeFi”, but an algorithmic stablecoin project called Basis Cash.
Basis wants to use an algorithm to adjust the money supply mechanism to mint a stable currency anchored to $1. This is different from the more familiar USDT and DAI.
USDT is issued under the endorsement of the centralized entity Tether. The essence of USDT is to ensure the rigid redemption of 1 USDT and 1 U.S. dollar by storing assets such as U.S. dollars in the bank. Its disadvantages are obvious. One is that Tether’s asset reserves in banks are not transparent and may be over-issued; the other is that USDT has been facing regulatory risks and is prone to thunderstorms.
DAI is to generate stablecoins on Ethereum through over-collateralization of ETH and other assets. Compared with USDT, it is more decentralized and has stronger anti-censorship capabilities. However, the over-collateralization mechanism leads to low asset utilization.
Basis has adopted an unprecedented way to “redefine” stablecoins. There are three roles in the Basis system, namely BAC (Basis Cash), BAB (Basis Bond) and BAS (Basis Share Equity). Among them, BAC is a “stable currency” anchored to the value of 1 US dollar, BAB is equivalent to bonds, and BAS is equivalent to the equity of the issuer. Both BAB and BAS are designed for the goal of “BAC equals $1”.
BAC (cash) and BAS (equity) can be generated through pledge mining/liquidity mining. The initial mining will limit the supply, which causes the price of BAC to far exceed $1 in the initial stage of the project. After the coin supply is rebase, the system will issue a certain amount of BAC through the algorithm, so that the price of BAC will return to $1. The first generation of algorithmic stablecoin AMPL is designed in this way.
Unlike AMPL, when the price of BAC is less than $1, users can use BAC to buy “bond” BAB. The price of BAB is set as the quadratic of BAC. For example, if the price of BAC is 0.9 US dollars, then the price of BAB is 0.9 * 0.9, or 0.81 US dollars, which is equivalent to buying at a discount. BAC as purchasing power will be destroyed to achieve a deflationary effect.
If the BAC rises above 1 U.S. dollar, the BAB (bond) in the user’s hand can be exchanged for BAC 1:1, and the price difference will be generated in the middle, and the user can earn the difference.
Another token, BAS, is used as equity, which can be obtained by providing liquidity to the two trading pairs BAC-DAI and BAS-DAI. These equity can wait for BAC to be issued and exercised. For each additional issuance of BAC, the system will repay the bonds first, and users can use BAB 1:1 to exchange for additional BAC; the remaining BAC will be used as dividends and distributed to BAS holders.
This system has a loop like this-
Users who want to obtain equity (BAS) need to conduct liquidity mining, and mining needs to buy BAC or BAS, which will increase the demand for two currencies (Note: the initial 50,000 BAC pledged by 5 stable currencies The staking pool for generating and completing the initial issuance of BAC has been cancelled at present).
When the BAC is higher than US$1, it will pay dividends to BAS holders; if it is lower than US$1, it will be deflationary and provide users with arbitrage space by issuing BAB bonds. Basis uses this method to ensure that the price of BAC is maintained at about $1.
IOSG Ventures, a venture capital firm in the crypto industry, has made a vivid analogy, which regards BAC, BAB, and BAS as the U.S. dollar, U.S. dollar Treasury bonds and Fed stocks respectively. Put these concepts into it, and you will find that the BAC minting issuance is similar to the US dollar issuance.
Due to the high profitability of early liquid mining, Basis quickly became popular once it was launched. Just as Uniswap led to the birth of a large number of AMM (Automatic Market Maker) exchanges, many developers also imitated Basis to produce “imitation disks” on different blockchain networks. For example, there are Basis Coin and Mith Cash on Ethereum. There is Basis Gold on the Heco chain, and USDX on the EOS chain.
The hidden capital risk behind innovation
According to IOSG Ventures, algorithmic stablecoins such as Basis have the characteristics of decentralization and censorship resistance. It creates a unique way of stabilizing currency prices without collateralizing other assets, making full use of people’s profit-seeking characteristics, relying solely on market will and algorithms for regulation, and having the opportunity to realize a truly decentralized stable currency for the first time.
In today’s encrypted asset market, participants have realized the strong demand for assets such as stablecoins on exchanges and blockchains. However, the existing stablecoins in the market have their own drawbacks. For example, the USDT issued by a centralization has the risk of opacity and weak anti-censorship capabilities, while the stablecoin DAI issued by pledge of other assets has the defect of low capital utilization caused by capital locking. The emergence of Basis seems to let people see a new way of generating stablecoins.
Some people in the industry believe that the potential of algorithmic stablecoins and algorithmic synthetic assets is unlimited. Under the situation that centralized stablecoins are subject to more and more stringent supervision, the demand for algorithmic stablecoins may increase significantly and even become the mainstream choice.
However, algorithmic stablecoins such as Basis are still in the experimental stage, and the idealization of the adjustment mechanism cannot keep up with the real environment of the market. For example, due to liquidity mining incentives, market demand has surged, leading to a bubble stage. Even after many rounds of rebase, the price of many algorithmic stablecoins is still higher than 1 U.S. dollar, which makes “stable coins” seriously de-anchored and extremely unstable.
When rewards are reduced or disappeared, or there is no new capital entering the market, algorithmic stablecoins may present systemic risks. For example, when a certain algorithmic stablecoin drops below 1 U.S. dollar, the market does not want to convert it into bonds, but sells it directly, which may cause the stablecoin to enter a death spiral and fall rapidly.
There are precedents. “Imitation” Basis Coin’s algorithmic stable currency BCC has fallen to about $0.5. There are rumors that its founding team smashed the market and ran away. After the market lost confidence in it, the situation was naturally that the funds fled and its “self-balancing system” was destroyed.
There is another argument that simply points the essence of algorithmic stablecoins to the “funding market.” According to the mechanism of this kind of stable currency, if you want to obtain Cash (stable currency), you need to hold Share (equity); while obtaining Share, you must either buy Cash or buy Share to pledge mining, which is more like a creation out of thin air “Internal Needs”.
Although IOSG Ventures treats the three token rights in the algorithmic stable currency as the U.S. dollar, U.S. dollar Treasury bonds and Fed stocks respectively. But whether it is Cash, Bond or Share, they are essentially different from the above three assets. They are not supported by full redemption rights and profits, and they are completely dependent on the capital investment of later generations. Therefore, although the algorithmic stable currency considers currency flexibility, this flexibility relies on a zero-sum game.
But the financial blogger “Ziyubit” believes that the algorithmic stablecoin is a mathematical financial experiment. Although it is likely to fail without government bank endorsement, it does not affect the interesting process of this financial experiment. Regarding the nature of the algorithmic stablecoin, whether it is a capital market or an innovation depends on the perspective from which to look. “I saw a little shadow of BTC on Basis, as well as the charm of mathematics. It may have a capital side and a currency reform side.”
Algorithmic stablecoins who want to use human nature in the financial market underestimate the complexity of human nature. The trend of algorithmic stablecoins led by Basis has indeed brought a new trend of DeFi, but this model is indeed still in the experimental stage and there are drawbacks. At this time, the entry of funds will not rule out that it will be the cannon fodder of “test failure”. The emergence of “pan” will inevitably accelerate the process of bubble bursting. When investors participate in algorithmic stablecoins, they must understand the mechanism in detail and carefully evaluate multiple risks.
