If you own any Bitcoin, you’re probably in the habit of watching its price fluctuate wildly. What you aren’t doing is using your Bitcoin to buy things. It’s too valuable, not to mention unpredictable.
Enter Basis, a year-old, 10-person, Hoboken, N.J.-based cryptocurrency startup at work on a “stable coin” whose elastic supply will ostensibly expand and contract to keep its value at about a dollar instead of all over the map. The company’s big idea: to develop a new token that people will actually use, instead of use to speculate.
Investors apparently love what Basis is cooking up. The upstart is announcing today that it has raised a somewhat stunning $133 million in funding from Bain Capital Ventures, GV, longtime hedge fund manager Stan Druckenmiller, one-time Federal Reserve governor Kevin Warsh, Lightspeed Venture Partners, Foundation Capital, Andreessen Horowitz, WingVC, NFX Ventures, Valor Capital, Zhenfund, Ceyuan, Sky9 Capital, Digital Currency Group and others.
Reuters reported on part of the round last October, though CEO Nader Al-Naji, who co-founded the company with former Princeton classmates Lawrence Diao and Josh Chen, didn’t share specifics at the time on how much the company was in the process of raising.
Al-Naji continues to keep details close to the vest, declining in an interview yesterday to discuss when, exactly, Basis’s tokens will be in circulation. He also declined to share when he believes the token could see widespread adoption or to elaborate on the major apps with which he says Basis plans to integrate.
He did explain his love of Bitcoin, first fostered during his senior year of college in 2012 when he managed to mine 22 Bitcoins. (“There was free electricity on campus,” he told us with a laugh.) It returned in 2016 when, as he readily admitted, he couldn’t help but notice his Bitcoins’ value begin to soar and became fascinated anew with cryptocurrencies.
The three founders, who worked at D. E. Shaw and Google out of school, have their eye on three ways to get their cryptocurrency adopted. The developing world is one target market, given that many countries’ currencies are inflating at annual rates of 5 to 10 percent and sometimes more. (Bitcoin was intended to solve this issue but quickly came to be used as a store of value instead as its price continued to rise.)
They also see Basis as positioned well to take advantage of the large crowdfunding market. The reason: If an outfit is crowdfunding for more than a few days, the prices of many currencies can move, which isn’t ideal, particularly if those currencies happen to be dropping in price.
Not last, they imagine that cryptocurrency exchanges that are currently dealing with all kinds of pricing gyrations will embrace Basis. As investor Salil Deshpande of Bain Capital Ventures describes it in a new Medium post about the outfit, this last scenario alone is a huge opportunity, given that “regulatory, tax and legal issues make it onerous and costly for cryptotraders to trade with fiat, and many crypto exchanges do not even offer the ability to use fiat. A stable crypto store of value enables streamlined trading without incurring dry-powder volatility risk.”
How it all works isn’t crystal clear to us as of this writing, but when demand is rising, the system will create more of its currency, Basecoins, and when demand is falling, the company will reduce their supply to create an increase in price. We gather from its white paper that early investors benefit off this supply and demand movement.
Much more specifically, says Basis in its white paper, it plans to use a three-token system to handle expansion and contraction. It defines these as:
• Basecoin. Called coins for short, these are the core tokens of the system. They are pegged to the USD and are intended to be used as a medium of exchange. Their supply is expanded and contracted in order to maintain the peg.
• Base Bonds. Called bonds for short, these tokens are auctioned off by the blockchain when it needs to contract Basecoin supply. Bonds are not pegged to anything, and each bond promises the holder exactly 1 Basecoin at some point in the future under certain conditions. Since newly-issued bonds are sold on open auction for prices of less than 1 Basecoin, you can expect to earn a competitive premium or “yield” for your bond purchase. The conditions under which a bond is redeemed are:
◦ The blockchain is creating and distributing Basecoin, i.e., it has determined that an expansion of the Basecoin supply is necessary.
◦ This bond has not expired, i.e., it has been fewer than 5 years since the bond was issued.
◦ All Base Bonds that were issued before this bond have been redeemed or expired.
• Base Shares. Called shares for short, these are tokens whose supply is fixed at the genesis of the blockchain. They are not pegged to anything, and their value stems from their dividend policy. When demand for Basecoin goes up and the blockchain creates new Basecoin to match demand, shareholders receive these 13 newly-created Basecoins pro rata so long as all outstanding Base Bonds have been redeemed.
When it comes to expansion, it works as follows, says Basis’s white paper:
First, the blockchain tallies any outstanding Base Bonds and orders them according to when they were issued, with the oldest first. We call this ordered sequence of bonds the Bond Queue. The blockchain also tallies all outstanding Base Shares. Then, the blockchain creates N new Basecoin tokens and distributes them as follows:
• Bondholders are paid first, and in first-in-first-out (FIFO) order. If there are any outstanding Base Bonds, the blockchain begins converting bonds into coins, one-for-one, according to their order in the Bond Queue. For example, if we need to create 100 Basecoin, we convert the 100 oldest outstanding bonds into 100 new coins. The FIFO queue incentivizes people to buy bonds sooner than later, since bonds bought sooner are paid out before bonds bought later.
• Shareholders are paid after bondholders. If there are no more outstanding Base Bonds, the system issues any remaining new coins to shareholders, pro rata, as a dividend. For example, if we need to create 1 million Basecoin, and there are 0 outstanding bonds and 10 million outstanding shares, then each share receives 0.1 Basecoin.When the price is too low, the protocol auctions Base Bonds at a discounted price in an attempt to reduce the supply of Basecoins. Base Bonds promise to repay 1 Basecoin at some point in the future. In contrast, when the price is too high, the protocol increases supply by issuing new Basecoins to pay back the holders of Base Bonds. If all Base bond holders have been paid but the price is still too high, the protocol distributes Basecoins to Base Share holders under the impression they will sell them in the open market, until the price decreases back to the target price.
Basis is not the only company working to develop a stable cryptocurrency for individuals and institutions looking to use digital currency as easily as they do fiat currencies. A growing number of companies sees the opportunity that Basis has in its sights. (You can learn more about some of them here.)
Still, Al-Naji sees Basis playing a winner-takes-all game, in what investor Deshpande and presumably the company’s other backers see as a multi–billion opportunity.
“We do believe that one winner will capture most of the mind share and create products and an ecosystem that uses its cryptocurrency,” says Al-Naji. “And we think once that foothold is in place,” it’s game over for other competitors, he suggests.
Certainly, the kind of backing it has landed looks to help toward that end. Stay tuned.
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