Third-generation stablecoin, Basis, gets $133 million in backing
Several third-gen stablecoins are emerging, but Basis might be one of the most strongly-backed.
Stablecoins are their own category of cryptocurrency. They're designed to maintain a set peg, and avoid the volatility inherent to cryptocurrencies. Unsurprisingly, the most common peg is US$1.
There have been three distinct generations of stablecoin so far, with new developments in distributed ledger technology and economic theory spurring new coins.
The first generation is digital coins like Tether and TrueUSD, pegged to fiat currency and backed with fiat currency. Essentially these are just tokens programmed to be valued at US$1, whose issuers say they have a lot of money in a bank account somewhere to back the tokens they issue. Many gold-backed tokens, such as DigixDAO, arguably fall into this category.
The second generation mostly consists of asset-backed coin pairs. For example, MakerDAO (system coin) and Dai (stablecoin) which is backed by Ether collateral, and uses a series of smart contracts to automatically trade Ether and MakerDAO coins to maintain the Dai's US$1 peg. These ingenious systems are designed to flexibly give security and value to their paired stablecoin.
The third generation is getting increasingly crowded and complex. This genre of coins is focused strongly on economic theory, to create stablecoin systems without any outside collateral. Basis is one of these coins, along with others like Havven and USDX. These cryptocurrencies are essentially designed to be self-sustaining economic systems, which can expand and contract as needed just like a central bank issued currency. Except in the case of these coins, the expansion and contraction is controlled by an algorithm, rather than by a central authority.
Basis might be the best-funded third-gen stablecoin to date, with big name backers like Andreessen Horowitz, Digital Currency Group, Pantera Capital and many more.
Creating value without collateral
Each third-gen stablecoin works in slightly different ways, but all of them have multiple tokens in their system which prop up each other's value.
There's the speculative token, which is designed to be bought and sold and traded based on its potential future value, and the stablecoin which is designed to remain steady by being backed up with the speculative token.
Havven is a paired coin system, with the speculative Havvens and the stable Nomins which are pegged to US$1. Both are ERC20 tokens.
Havvens can be locked up in escrow to release more stablecoins into the economy, and only withdrawn by depositing a corresponding amount of stablecoins. This essentially lets all Havven holders become their own central banks, and issue or buy back their own tokens. The Havvens are given value by picking up the nominal transaction fees involved in Nomin transfers.
It slightly adjusts transaction fees and how they're divided to encourage Havven-holders to use their stash usefully. There are slightly higher rewards for Havvens locked in escrow to issue tokens, and the system-wide transaction fees are slightly higher (for the benefit of Havven owners) when the ratio of locked-up Havvens and issued Nomins is in a healthy range.
The USDX protocol is broadly similar to Havven, with a few differences. The main difference is that its stablecoin peg isn't directly maintained by the amount of tokens in circulation, but rather that it massages the system's economic policy to encourage appropriate token lock-ups to maintain the peg.
Basis uses a three-token system.
The Basis coin is the stable token, while its economy's value is maintained by bond tokens and share tokens.
Bond tokens are created by the system and openly auctioned off for less than 1 Basis. For example, someone might place a bid for 100 Bonds at a price of 0.9 Basis per Bond.
If the economy needs to expand (to put more Basis coins into it), then Bonds are converted into Basis, giving a net gain for the Bond buyer. If the economy needs to contract, then it sells off Basis to the outstanding Bonds, starting with the highest prices.
Share tokens are created and issued right at the start and have a fixed supply with no inflation. They earn dividends for holders, and newly created Basis coins are issued pro-rata to Share holders if the economy needs to expand, and all Bond tokens have already been redeemed.
One of the other differences, which may have helped spur the $133 venture capital fundraising round, is that Basis is focused on developing countries.
"Most people in the developed world take for granted their access to a stable currency. In the developing world, however, the most stable currencies that people have access to are often inflating at annual rates of 10% or more," wrote Basis CEO and co-founder Nader Al-Naji.
"Bitcoin was intended to be the solution to these problems. But its volatility makes it as deficient and ineffective as a hyperinflating local currency. As a result, it has brought us a tool for speculation and not much more."
"We believe Basis can help solve this problem of currency instability for people in the developing world. By providing anyone with an internet connection access to a stable and secure medium of exchange for the first time, we believe Basis can significantly increase the efficiency of the economies of developing nations. This would help us achieve a dream that has eluded cryptocurrencies until now."
"We are proud to say that our backers now form an international network of supporters who have come together to help us make Basis the next great monetary system."
All third generation stablecoins can theoretically expand and contract as needed, to maintain stable prices in real world situations, although some might do it better than others. The key to success though, might lie in real world uptake. Here, Basis with its extensive VC backing and potential to start seeing real use somewhere it's actually needed, might make see it become more widely used, more quickly than others.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, XRB
- Binance Venus, the Fourth Industrial Revolution and empowering the bottom billion
- Australian cryptocurrency Horizon State collapses under lawsuit from founder Oren Alazraki
- Japan’s largest Internet company launches cryptocurrency exchange service
- Binance announces Venus: A major localised stablecoin project now underway
- Bakkt cleared to launch 23 September to provide “a trusted ecosystem”