Stablecoins have increased in popularity over the past few months, and one of the many reasons for this surge has been the volatility of the crypto market.
This summer, some of the largest crypto exchanges provided listings of the most popular stablecoins on their platform, with the Gemini Dollar, Paxos, and True USD among some of the stablecoins that have been able to achieve widespread integration. Despite all this, not all stablecoins have enjoyed smooth sailing. According to reports from The BlockCrypto, algorithmic stablecoin project, Basis will wind down operations.
Basis is a stablecoin project that was created by U.S. cryptocurrency startup Intaginble Labs, who raised $133 million from leading investors including Andreessen Horowitz, Capital Ventures, Lightspeed Ventures, and others. The goal of the company was to build a stablecoin backed by an algorithmic central bank.
The ‘Basis’ Project and Its Unique Stablecoin
A lot of the stablecoins created after Tether all tried to become what Tether is but without the controversies. Unlike Paxos and USD Coin that are backed by the U.S. dollars 1:1, Basis achieves parity with the dollar by having a supply that moves in line with the demand. When the demand expands, supply has to expand in like manner. Similar to the principles employed by central banks.
The project uses three tokens to achieve this. The Basis tokens, the core tokens of the system; the Bond tokens, these are sold to contract the supply of Basis and the Share tokens; they are issued to current shareholders when the demand for Basis goes up.
The idea sounded brilliant on paper, but the recent report seems to point to the contrary. The truth is that the proposed algorithmic model would have been a tad too difficult to implement, considering the regulatory framework of the United States financial system.
This means that the only way for Basis to maintain a stable price would be to continually decrease and increase its supply, especially in the midst of a market volatility, which is not particularly ideal.
The Problem
The still-unknown problem that the project might have encountered with U.S. regulators could be the lack of evidence which shows that the asset will be able to maintain its parity with the dollar. The stablecoin’s method of fixing the crypto volatility issue might have been ingenious, but such a project could still run into legal issues, especially in the market’s current state and with the lack of a clear approach from regulators.