
Basecoin, aka the Basis Protocol - pjbyrne
https://prestonbyrne.com/2017/10/13/basecoin-bitshares-2-electric-boogaloo/
======
hcmag
I've worked with these founders over at Google. They were normal, middle-of-
the-road SWEs working on some (fairly boring) DoubleClick teams, one of which
eventually shut down. In a matter of a year, with no revenue, code, product,
or customers, I can't believe they've raised over $100m.

Are investors just betting on pedigree at this point? In which case, is a
Princeton undergrad degree really worth that much?

Moreover, their stint in Google Search lasted maybe 2 months, but is still
prominently displayed in their bios. Is that worth another few million?

I can't think of a better example of the SV echo chamber when an investment
like this is announced. Even color.com and Juicero had more experienced
founders/prototypes.

The future looks bleak when you see fashionable SV outfits leading the blind.
It's no wonder why diverse founders with great ideas have trouble getting
funded when so much money is going to companies like this.

~~~
samfisher83
They must be good at selling if they can convince people to get 100+ million
with no "revenue, code, product, or customers." You can't hate on someone for
making it.

~~~
gitgud
In other words, "you gotta respect the hustle"

------
chrisco255
MakerDAO's DAI coin (currently collateralized by ETH) has already proven quite
stable in the face of several black swan events and the price of Ethereum
crashing nearly 70% over the past couple of months. They're in the process of
adding more assets to back the currency to improve stability. The supply is
capped by a debt ceiling. There are sound principles behind the currency, and
it being an ERC20 token, it's got all the advantages of being pluggable into
the ETH ecosystem.

It's not a bad idea, it's actually a great idea and if DAI or BaseCoin turns
out to be stable-ish over the long term, then it will be incredibly useful for
the crypto ecosystem. Honestly, even if DAI fluctuates a few pennies here and
there, if it's stable-ish it will be useful for a wide variety of services and
applications.

~~~
drcode
DAI coin is just diversifying risk by using multiple underlying assets- So
instead of a 10% chance of the value dropping 90% due to a failure of an asset
guarantor, it will just have a 90% chance of dropping 10% in value. The
MakerDAO organization can likely cover this 10% loss in asset value by using
their enormous capital, but this is not a sustainable strategy for creating a
stable synthetic asset.

I think sustainable synthetic blockchain assets are possible, but they will
always have complicated risk/reward profiles that won't fully mirror the
underlying asset they are designed to model: The dream of a truly "synthetic
dollar" will always remain a dream.

EDIT: I should clarify that I think DAI coin may still be a useful construct
for some situations, but it's going to be an asset with very different
properties compared to any target real-world asset.

~~~
zdkl
>this is not a sustainable strategy for creating a stable synthetic asset

Could you give some pointers for further reading on the subject please?

~~~
drcode
There's not really much reading on this- You simply can't take 10 assets that
are worth less than $1 individually (because of guarantor risk) and mix them
together to create an asset that's pegged at exactly $1- This is not a problem
that can be solved by "diversification".

For other history on synthetic assets, read Preston's posts and also Vitalik's
posts such as [https://blog.ethereum.org/2014/03/28/schellingcoin-a-
minimal...](https://blog.ethereum.org/2014/03/28/schellingcoin-a-minimal-
trust-universal-data-feed/)

~~~
chrisco255
MakerDAO's system over-collateralizes on DAI. Currently, it takes at least
$1.50 of ETH to create $1 of DAI. This is based on the volatility and risk
profile of ETH. These parameters are adjustable by MakerDAO token holders.
Suppose they added gold to the asset basket where 50% of DAI was backed by
gold and 50% was backed by ETH. They could require 125% position on gold and
150% position on ETH. In this case, 50% of the supply of DAI would be subject
to the whims of ETH price while 50% would depend on gold. If gold or ETH were
both to drop to near zero at nearly the same time so rapidly that the CDPs
could not be liquidated in time, then the system would be at risk. Seeing as
how Gold and ETH are not correlated, this is an unlikely event. Adding 8 more
uncorrelated assets to the protocol would only further improve the stability
of the system.

~~~
drcode
The inherent problem is that even if you are heavily diversified, in order to
back by 50% gold you'd need to have 50% gold PLUS 50% MULTIPLIED BY THE
PROBABILITY THE GUARANTOR FAILS.

For ether, such overcollateralization isn't a problem, because you can package
it as an ether derivative and have no counterparty risk... But for a gold
collateral you would have a risk that cannot be mitigated in this way and the
risk will need to increase the slippage of the asset.

~~~
chrisco255
As time progresses, other guarantors will place their assets on the blockchain
similarly to Digix. And when other guarantors come online, Maker will be free
to add those to the pool. As it stands, Digix provides Assay certificates and
undergoes third party auditing. MakerDAO is off to a great start. They're
doing all the right things to build a sustainable stable coin.

------
wyas
Stablecoins are fundamentally broken and unsound. Ignoring the tech-stack that
achieves price stability, and looking at them purely economically, the math
simply breaks down.

This is a great writeup on Basecoin, but there's another player in town called
Carbon ([https://www.carbon.money/](https://www.carbon.money/)). Directly from
their whitepaper:

"Carbon utilizes a decentralized schelling point scheme to achieve distributed
con- sensus on Carbon’s exchange rate. Every 24 hours, also known as the
rebasement period, a schelling point scheme is initiated where nodes submit
bids for what they believe the true exchange rate of Carbon to be. Each bid is
weighted by a collateral, denominated in Carbon. At the end of the 24 hours,
bids are to- taled and the protocol takes a weighted average of the bids.
Anyone who bids outside the 25th and 75th percentiles will have their balances
slashed. Anyone within the 25th and 75th percentiles receive a normal
distribution of the loser’s balances, with the highest reward distribution at
50% and normally diminishing on the right and left respectively"

This has security issues. Unless they own all the participating nodes, then --
as written -- this protocol has several ways that it can be gamed with enough
Byzantine players so that the Byzantine parties are w.h.p. in between the
25-75 range and correct nodes are at the edges, which then get their funds
slashed. They use several (also broken) mechanisms for contraction and
expansion depending on the agreed-upon exchange rate, but supposing they are
not broken, the true value of the coin can be gamed which then invalidates
these mechanisms. We are truly so deep in mania.

EDIT: Also to add a bit more to Carbon: Hashgraph is also simply a BFT
protocol that requires a permissioned setup. If we are going to deploy a
smart-contract-enabled stable cryptocurrency on a permissioned network, then
it is unclear why this complicated and unproven stack is even needed.

~~~
zodiac
> Stablecoins are fundamentally broken and unsound. Ignoring the tech-stack
> that achieves price stability, and looking at them purely economically, the
> math simply breaks down.

You seem to be making a claim about the space of all possible stablecoin
designs, and then then proceeding to demonstrate weaknesses in one particular
stablecoin design.

~~~
JumpCrisscross
Stable coins are unstable because they're inherently leveraged. This is a
problem that traces back to the original "stable coin," bank deposits.

~~~
darawk
> Stable coins are unstable because they're inherently leveraged.

No they're not. Asset-backed Stable coins are not leveraged.

------
panarky
Before you read this 2000-word treatise, know that the author, Preston Byrne,
has a history of misunderstanding fundamental concepts about money and
markets.

Example 1: He believes Bitcoin is a fractional reserve system.

[https://news.ycombinator.com/item?id=15792314](https://news.ycombinator.com/item?id=15792314)

Example 2: He doesn't understand that market participants bring liquidity to
exchanges, so he thinks exchanges themselves go bankrupt if market prices
decline.

[https://news.ycombinator.com/item?id=15792065](https://news.ycombinator.com/item?id=15792065)

I don't have a horse in the Basis Protocol race, but I have little confidence
that this author understands the basics.

~~~
wyas
Attacks on the author aren't the best thing in general
([https://upload.wikimedia.org/wikipedia/commons/a/a3/Graham%2...](https://upload.wikimedia.org/wikipedia/commons/a/a3/Graham%27s_Hierarchy_of_Disagreement-
en.svg))

~~~
panarky
I agree that ad hominem attacks are generally counterproductive when your goal
is to evaluate an argument.

However, when deciding whether to invest hours reading and discussing his
latest arguments, the author's credibility is a factor.

~~~
wyas
Preston has some beliefs that don't make a lot of sense, I agree. But his
ability to reason about technical facts is not impeded.

There is no fundamental argument he makes that can be refuted soundly, besides
just disagreements in opinion.

------
JumpCrisscross
Cryptocurrencies have reached the 1980s, with "stable coins" attempting to
achieve the "impossible trinity" [1] of a fixed foreign exchange rate ( _i.e._
"stable"), free capital movement ( _i.e._ liquidity) and an independent
monetary policy ( _i.e._ reasonable collateral rates).

Prediction: to prevent a breakdown of stability, the marketing point for these
schemes, we'll see, for coins without a centralized bottleneck, stupid
collateral rates, and for coins with one, redemption restrictions.

[1]
[https://en.wikipedia.org/wiki/Impossible_trinity](https://en.wikipedia.org/wiki/Impossible_trinity)

~~~
darawk
> The formal model underlying the hypothesis is the uncovered Interest Rate
> Parity condition which states that in absence of a risk premium, arbitrage
> will ensure that the depreciation or appreciation of a country's currency
> vis-à-vis another will be equal to the nominal interest rate differential
> between them. Since under a peg, i.e. a fixed exchange rate, short of
> devaluation or abandonment of the fixed rate, the model implies that the two
> countries' nominal interest rates will be equalized. An example of which was
> the consequential devaluation of the Peso, that was pegged to the US dollar
> at 0.08, eventually depreciating by 46%.

Stablecoins don't set their own monetary policy. The interest rate on a
stablecoin will be set by the market, not a central bank. The interest rate
here is the escape valve that allows the exchange rate to be fixed. The
interest rate floats, the exchange rate remains constant.

~~~
JumpCrisscross
> _The interest rate floats, the exchange rate remains constant_

Collateral rates have a practical cap, particularly in a time of broader
financial crisis. This structure is identical to the "always redeemable"
structured products from a few decades ago. There is zero innovation in the
financial engineering, just the presentation.

------
mkirklions
After being shilled on /r/cryptocurrency, I dont trust any alt coin now.

While this is probably going to be an economic disaster based on the
redistribution, its merely another alt coin solving a non-existent problem.

------
abhv
The last bondholders will be left holding worthless obligations when no new
buyers are there to create demand.

The institutional investors seem to recognize the ponzi nature of this; first
money in, first money out at several X. The veil of "crypto-economics" around
this gives them plausible deniability in engaging in this wealth transfer
mechanism.

------
thisisit
Something is unstable because market wants it to be unstable. There are no
mathematically underpinnings which can stop them from a long time. This is a
fallacy which cryptocurrency groups need to wake up from. Sure it looks like
math can solve this problem and many have over the years relied on solid math
only to fail. See:

[https://en.wikipedia.org/wiki/Long-
Term_Capital_Management](https://en.wikipedia.org/wiki/Long-
Term_Capital_Management)

But, what about controlling supply like Basecoin? See SNB peg of 1.2:

[https://en.wikipedia.org/wiki/Swiss_franc#2011%E2%80%932014:...](https://en.wikipedia.org/wiki/Swiss_franc#2011%E2%80%932014:_Big_movements_and_capping)

Their peg was broken many times before they removed it completely in 2015.

------
scotty79
> The money to keep the machine going must come from somewhere, and in this
> case that somewhere is a new investor willing to subsidize profit-taking by
> earlier participants in the scheme by committing risk capital of his own.

This exact thing could be said about bitcoin and other cryptos and any other
scarcity based investment vessel. It sounds like a horrible flaw but it didn't
stop anyone thus far.

The only thing this indicates is that at some point in time baecoin will loose
its peg. But it might be decades in the future.

Although I think author is spot on with overall assesment. And failure after
loosinh the peg will probably be anything but graceful.

------
nebulous1
Regarding Tether, you can be rightly suspicious but it's not just the exchange
run by its corporate parent that you can trade it for a dollar on.

------
jjallen
The crazy thing about stable-coins is that they're really trying to
replace/disrupt fiat money, more so than normal cryptocurrencies like Bitcoin
or Ethereum.

"Normal" cryptocurrencies are way too volatile to actually be a store of
value, as of yet, so stable coins really do fill a void and have one of the
features of a fiat currency such as the U.S. dollar, that of relative
stability.

------
mempko
This is good but the author makes a common mistake referencing fractional
reserve banking. Fractional reserve banking really isn't a thing. Most central
banks in the world don't have reserve requirements. Even in the USA, only a
small subset of debt requires reserves. And even then the reserves can be met
in 30 days.

------
natch
>In English:

...(proceeds to use latin)...

------
mattbeckman
This guy doesn't give Bitshares enough credit.

His review from 2014 may hold water in a low liquid scenario, but even for a
mildly strong market, it's always been a better alternative than, say, the
magically backed world of Tether.

~~~
monochromatic
Damning with faint praise.

~~~
mattbeckman
Not really.

He basically says the Bitshares approach is unsound because it requires market
forces to be > 0\. I agree that you can't have a stable pegged asset when
nobody wants to participate in that market. However, if nobody wants to
participate, then why do we care about stable pegged assets in the first
place.

~~~
monochromatic
Oh I just meant that when you said "it's always been a better alternative
than, say, the magically backed world of Tether," it was pretty faint praise.

------
wellboy
Why can't you simply make a stable coin where you bet long and short at the
same time?

Bitcoins goes up 5x, you gain from your long and lose from your short. Then,
you find an algorithm that balances it out properly, done.

~~~
drcode
This scheme will always have one of these problems: (1) people will be
required to lock a large amount of collateral to cover their bet that is
uneconomical or (2) the peg will break during extreme fluctuations.

~~~
wellboy
Why is that? If BTC goes 20x, then the long position liquidates, but so does
the 20x short position.

~~~
justrobert
If you are interested in this, people tried the long/short strategy in
currencies (forex) and called it a grid trade.

The system would be both long and short the same contract and take profit at a
given interval on both sides. When they took a profit, they would reopen a
trade on the same side.

Ultimately it was just a mean reversion strategy where one would not close out
their losses. So the profit was linear while the losses often became geometric
until the time the market came back to where they started the grid.

If you just want to buy both sides and never close either trade, there is no
profit just a loss of spread/commission on both legs.

Most of the people who did it looked at their account balance rather than NAV,
so they were mostly just abusing leverage until a margin call.

Edit: To be fair, some grids were smarter in their allocation and weighted to
be positive to the carry, so at least they would collect interest everyday
when the contracts swapped.

------
lacker
One thing that jumped out at me was that the article compares modern
cryptocurrency to the dot com situation in 1997-1999, and is using it to
criticize cryptocurrency.

27 billion dollars were raised in 1997-1999. Perhaps most of that was wasted.
But just one company started in that time period, Google, is now worth 700
billion dollars. From an overall point of view, the dot com investment era was
_good investment_. People just weren't sure which companies were going to be
the winners.

~~~
pdog
Public investors lost much more than $27B. (Private investors made money.)

There were thousands of IPOs during the 1996-1999 period. Hundreds of billion
of dollars were raised.

The impact of the dot-com bubble in terms of actual losses was hundreds of
billions or even trillions of dollars.

~~~
Retric
Net losses are different from nominal losses. If someone buys at 10, the stock
hits 15$ then drops to 5$, they lost 5$ a share not 10$ a share. We are easily
talking about 100's of billions in losses, but 1.7 trillion is an over
estimate.

------
hisabness
Preston takes an insulting tone towards the basis team. Fine to critique, but
assumes the visionaries of this project are uneducated, or haven't given
things proper thought. I assure you they are thoughtful...

~~~
simias
>I assure you they are thoughtful...

I thought you were arguing from a position of authority but looking at your
comment history all I can find is "I'm a blockchain investor abi at
ldgr.capital" which leads me to a placeholder website. You'll have to come up
with something a little more convincing if you want us to trust your judgment.

~~~
hisabness
If you glance at their whitepaper, stability analysis, or old FAQs they had
up, it’s clear they’re thoughtful. Therefore, comments like these
underestimate the founders:

 _“Please. Figure out what a government bond is, first. Then we can have a
little chat about scalability.”_

 _" electric boogalo"_

 _" But you need to study politics, economics and history to learn things like
this, which I understand are not computer science and are therefore
unpopular"_

