BaseCoin is a cryptocurrency whose tokens can be pegged to arbitrary assets (USD) or a basket of goods (think CPI) while remaining completely decentralised. Their protocol algorithmically adjusts the supply of BaseCoin tokens in response to changes in exchange rate. This implementation of monetary policy is like central banks around the world that regulated the supply of money through expansion (think quantitative easing) and through contraction (reduction of money supply through fiscal or monetary policy means). BaseCoin intends to implement an algorithmic central bank which ensures the stable price and supply of BaseCoin tokens through its decentralised, protocol-enforced algorithm.
Any currency has three fundamental functions: a store of value, a medium of exchange and as a unit of account. Price volatility of cryptocurrencies is the biggest barrier to mainstream adoption of these as a medium of exchange. Changes in demand can result in massive fluctuations in prices in the market today. High price volatility also makes it difficult to create credit or debt markets on top of cryptocurrencies; as there is no way to price this risk premium into contracts efficiently. Price Stability is key to the creation of secondary markets.
BaseCoin is designed to create a robust cryptocurrency which is decentralised, and price stable enforced by an algorithmic blockchain protocol. Their protocol will initially be pegged to the USD (1 BaseCoin = $1USD) and eventually to a basket of goods, i.e. the Consumer Price Index (CPI), therefore removing fiat currency from currency pricing altogether.
This peg is then enforced by the blockchain protocol. Their blockchain protocol monitors exchange rates to measure price. These exchange rates are sourced from an Oracle system whereby information is uploaded from sources outside the blockchain to verify the pegged rate. The blockchain then expands and contracts the supply of BaseCoin tokens in response to deviations from the peg exchange rate. If Basecoin is trading above $1, new Basecoins are created and distributed. If BaseCoin is trading for less than $1, Base Bonds are created and sold in an open auction to take coins out of circulation. Base Bonds are created to cost less than 1 Basecoin, and they can be redeemed for exactly 1 BaseCoin, therefore incentivising participation in Bond sales. Basecoins used to purchase bonds are then destroyed, thus reducing supply.
This expansion and contraction of BaseCoin ‘Money Supply’ happen via their three-token system:
- Basecoin: These are the core tokens of the system, pegged to USD and are intended to be used as a medium of exchange. Their supply is contracted and expanded to regulate supply to maintain the peg.
- Base Bonds: These tokens are auctioned by the protocol when monetary contraction is needed. Bonds are not pegged and promise the holder exactly 1 BaseCoin 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. Redemption occurs when the protocol determines that an expansion of BaseCoin supply is needed.
- Base Shares: These are tokens whose supply is fixed at the genesis of the blockchain protocol. Their value stems from their dividend policy. When demand for Basecoin goes up, and new Basecoin is created to maintain the peg, shareholders receive these newly-created Basecoin pro rata so long as all outstanding Base Bonds have been redeemed.
BaseCoin outline several use cases for their price-stable cryptocurrency:
- Developing Markets: As an alternative to currencies in the developing world where rampant inflation and currency fluctuations cause economic hardship.
- As the basis for low-volatility crypto-assets for trading.
- Creating Credit and Debt markets built on crypto-asset which will only be possible when price risk is able to be ‘priced effectively’ by the market into contracts/products.
BaseCoin also addresses other projects in the market that have or are trying to address these issues as well.
The idea and economic theory behind this project are very interesting to me and worth reading for anyone who has thought about how cryptocurrency could become ‘money’ in the real world. BaseCoin makes many valid points about what needs to happen structurally in the world for cryptocurrencies to evolve into actual mediums of exchange, which can be used for daily transactions and for secondary markets.
What I would have liked to have seen in their project whitepaper is more detail about how the use cases translate into a revenue or business model for the project. Academically it completely makes sense. Transitioning from the idea into the long view about where and how the project will add value as a protocol or fund itself remains unclear to me. Building an algorithmic replacement for the ‘Fed’ is a great idea, but user adoption by ICO projects (as a ‘general use’ token), individuals, businesses, countries (as a replacement for ‘fiat money’) for example is a mammoth undertaking and hugely controversial. Dismantling centralised control of monetary policy is a big ask.