UPDATE 12/14/2018:

Sadly, the Basis (formerly Basecoin) project is shutting down. Citing US securities regulations, the team saw no way to implement their design without onerous and substantive alterations. The regulations would force measures such as 1) limiting token ownership to accredited investors and 2) enforcing transfer restrictions. Both actions centralize quite a bit of authority back to the Basis team and completely counteract the benefits of decentralization. Read the full statement for more information.

While the project is dead, the idea is not, and I hope other teams continue working on the important efforts described below.

For better or for worse, I’ve developed a bit of a reputation as “the cryptocurrency guy” around the office - the large Ethereum sticker on my MacBook Pro is hard to miss. And admittedly I’ve derailed a couple of happy hour conversations at the first mention of blockchain, Bitcoin, etc.

So it’s with great excitement that I came across an acquaintance's new project called Basecoin that presents a novel solution for one of the major issues with cryptocurrencies. The startup features an impressive list of investors and advisors, including Andreesen Horowitz, AngelList CEO Naval Ravikant, Coinbase co-founder Fred Ehrsam, and Bain Capital.

Decentralized currencies and blockchain technology offer advantages over traditional commerce by replacing third party payment processors with an electronic payment system based on cryptographic proof. The core innovations outlined in the original Bitcoin white paper and copied by nearly every subsequent cryptocurrency allow for lower fees, reduced levels of fraud, and immediate payment settlement. At a global level, cryptocurrencies are appealing because they are resistant to censorship, government-mandated exchange rates, and local currency inflation.

However, a lingering issue is price volatility. It can be fun for speculators - I watched my Bitcoin wallets gain 9% over the course of dinner last Thursday - but it hampers mainstream adoption. Merchants accepting cryptocurrency typically convert payments into USD/fiat because they are not in the business of currency speculation. If I pay for a yearly subscription to Wired using Bitcoin and the next day the asset drops 50%, well... you get the point. Companies will never trust their quarterly revenue to cryptocurrency while it remains such a volatile asset.

In Basecoin’s technical whitepaper released earlier this week, the authors describe several mechanisms for stabilizing a new cryptocurrency. The most impactful (and ambitious) is the idea of an algorithmic central bank. In traditional macroeconomics, central banks attempt to prevent frenzies and panics via expansions and contractions of the money supply. In a deflationary cycle, individuals are hesitant to buy goods, causing prices to drop, causing wages and prices to continue falling. Accordingly, central banks step in to expand the money supply by issuing currency, incentivizing people to resume spending and prevent a destructive feedback loop. Similarly, central banks contract the money supply to stabilize prices when inflationary pressures are rampant.

In cryptocurrencies designed thus far, the money supply (total available tokens) is fixed, preventing the ability to manage inflationary and deflationary spirals. Basecoin outlines an algorithmic governance policy that utilizes a three-token approach to peg Basecoin to any asset or index (such as USD or CPI) in near-real-time. The three tokens are “Basecoin”, “Base Bonds”, and “Base Shares”.

  • Basecoins are the medium of exchange, pegged to the USD (or other asset).
  • Base Bonds are used to contract the money supply by auctioning tokens off the blockchain in return for Basecoins in the future
  • Base Shares are a fixed quantity of tokens available at the genesis of the blockchain that receive dividend Basecoin payments when a monetary expansion needs to occur

Conceptually, this approach is similar to how the Fed directs price levels, except Basecoin executes it transparently, via a decentralized protocol, in real-time. All incentives in the three-token system are aligned to encourage speculators to restore Basecoin’s value to a peg.

The authors envision Basecoin enabling:

  • Credit and debit markets, since long-term contracts are feasible when price risk is eliminated
  • Systems recognizing Basecoin as a “universal token”, i.e. specialized app tokens can be quickly exchanged with Basecoin rather than fiat currencies or volatile BTC/ETH
  • Regional Basecoins pegged to local CPI

I’m particularly interested in reviewing forthcoming technical specifications regarding a) initial token outlays/issuance b) mechanisms to prevent manipulation (e.g. front-running the currency issuance algorithm) and c) how the protocol will handle price shocks. Regardless, I will be closely monitoring this project and I look forward to the advancements it can contribute to the cryptocurrency field and society more broadly. I encourage you to visit the website and read the Basecoin whitepaper: www.getbasecoin.com

Additional media coverage: Coindesk , Reuters, WSJ

"We believe that if we can just make it so that purchasing power doesn’t fluctuate, people will shift from a mindset in which they hold as little cryptocurrency as possible, to a mindset in which they are comfortable holding their savings or revenue in it. We believe this contribution will trigger cryptocurrencies to undergo a virtuous cycle of adoption and help them transition into a mainstream medium of exchange—a result that has eluded every other cryptocurrency thus far” — Basecoin Whitepaper