
Stablecoin Basis is closing down - leppr
https://cryptonews.com/news/usd-133m-stablecoin-basis-is-reportedly-closing-down-3064.htm
======
danielvf
Basis was something special. Its algorithm was such that if it ever stopped
growing at a sufficient rate, it would explode to zero. And this would remain
true no matter how much Basis had previously grown.

Every gain against a dollar by Basis was erased, either by paying off previous
bets, or by paying “dividends”, and would not count for future price
resiliency. If the market cap was 3 trillion and basis was used by 500 million
people, and it needed to issue “bonds” to hold the peg, then the doom clock
would start ticking again afresh.

In order for Basis to hold the price, you placed bets, not only that that the
price would go back, but that the market cap would grow enough beyond a parity
price to pay off every bet ahead of you in line. If the price just returned to
parity, you still got nothing. So the more outstanding bets, the bigger the
risk of placing a new bet. And this risk grew at a power ratio the farther
behind the currency got.

Basis could do nothing but explode.

~~~
danielvf
Don’t even get me started on the whitepaper...

“The critical insight is that as long as traders expect Basis price to correct
[and grow] in the long-term...” which makes a prerequisite out of what they
need to demonstrate.

And then there’s the part where they prove that their algorithm works by
pretending that their currency behaves like USD does. Of course if your
currency behaves like one of the most successful fiat currencies of all time,
backed by the most powerful government in the world, then everything will be
okay. If my hypothetical elderly Chihuahua dog had the driving ability and
limbs of Micheal Schumacher in his prime, then my Chihuahua could turn in some
nice lap times at the Nurburgring.

Whitepaper is still up for now. Enjoy.
[https://www.basis.io/basis_whitepaper_en.pdf](https://www.basis.io/basis_whitepaper_en.pdf)

~~~
Traster
I think you're being unfair with your quotation there. The point they were
making was that their system works over time, so whilst there can be temporary
disjunctions on the long term the mechanism works, and _therefore_ it's
reasonable to expect parity to return which will help in the short term. If
Basis were 95% of nominal value and you know that the algorithm ensures a
return to 100% then actually you're incentivized to buy in, in the knowldge
you can make profit lending liquidity. This may not be how it worked, but the
idea that the predictable long term mechanism incentivizing short term
behaviour isn't without merit.

------
nivertech
What they’re calling “bonds” are actually callable binary futures.

They either pay you 1 basis when called or they expire worthless, if Basis
economy will stagnate/contract for 5 years in the row.

Additionally they rely on unregulated crypto “exchanges” to make secondary
markets in these futures.

I think the reason they’re calling them “bonds” is because binary futures and
prediction markets are illegal in US (falling under CFTC jurisdiction).

Similar problem will apply if they were real bonds - then they're falling
under the jurisdiction of the SEC and will have to be registered with them or
get an exemption from registration.

EDIT:

For those who think that MakerDAO is better than Basis protocol, it's not that
Maker got CFTC license to operate a Swap Execution Facility (SEF)[1].

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

~~~
m3kw9
People are struggling to understand even Bitcoins.

~~~
barrow-rider
Not sure why this is getting downvoted. Parent is right, most folks don't get
it, even technical ones. Most people aren't in STEM, aren't making north of
six-figures doing tech, and aren't super literate when it comes to even basic
technology, like their car or IR TV remote.

This Christmas, buy everyone in your family and all of your friends $100 worth
of BTC. I'd bet my hat that you'd have to explain how it works, in a
practical-how-to-trade-this sense, to virtually all of them, save for those in
STEM. And even if they learned how it works, what's your aunt going to spent
the BTC on? Can't take it to Applebee's, or Wal-Mart, or Bed Bath & Beyond, or
pay a mortgage or a parking fine.

~~~
jandrese
By the time you explained it to them they would only have $50 worth of
Bitcoin.

~~~
keymone
Or $200.

------
EGreg
Whenever your network promises to maintain a peg to some other currency, you
are opening yourself to arbitrage by others taking advantage of your
guarantees, knowing you’re committed to certain actions.

That’s why a peg is never 100% certain.

That’s how George Soros broke the bank of England. But unlike England, an
autonomous network would simply continue to lose money and go bankrupt. Right?
Any ways around it?

[https://www.investopedia.com/ask/answers/08/george-soros-
ban...](https://www.investopedia.com/ask/answers/08/george-soros-bank-of-
england.asp)

~~~
gus_massa
One possibility is to hard fork the chain and convince everybody that the
forked version is the real version, including the users and exchanges.
(Something like the "fix" for "The DAO" in Etherum.) In the hard fork you can
change slightly the algorithm, or make a haircut (like the usual solutions of
countries in these situations).

The old unforked version of the coin will continue to drop to 0, and will try
algorithmically desperately to sell worthless bonds to try to raise the price,
but nobody sane would buy them.

I'm not sure if this is legal or moral, but I would not be surprised if
something similar appears in the future.

------
aiCeivi9
> Basis is designed to keep prices stable by algorithmically adjusting supply.
> When demand is rising, the blockchain will create more Basis. The expanded
> supply is designed to bring the Basis price back down. When demand is
> falling, the blockchain will buy back Basis.

So exactly how counties do/did with their foreign currency reserves. Hint - it
can and did end up blowing up in spectacular way.

~~~
arethuza
Out of interest, what do they use to "buy back Basis"?

~~~
thedufer
They auction off a sort of binary future that either converts to Basis in a
future event when they're increasing the supply, or expires worthless if no
such event occurs in a set amount of time (5 years, I think).

------
state
There's also a statement up on their site:

"Unfortunately, having to apply US securities regulation to the system had a
serious negative impact on our ability to launch Basis."

[https://www.basis.io/](https://www.basis.io/)

~~~
microtherion
"And we would have gotten away with it, too, if it weren't for those meddling
kids at the SEC"

~~~
CryptoPunk
They provide a point by point explanation of why this would make it difficult:

* Due to their status as unregistered securities, bond and share tokens would be subject to transfer restrictions, with Intangible Labs responsible for limiting token ownership to accredited investors in the US for the first year after issuance and for performing eligibility checks on international users.

* Enforcing transfer restrictions would require a centralized whitelist, meaning our system would not only lose its censorship resistance, but also that on-chain auctions would have significantly less liquidity.

* Having fewer participants in the on-chain auctions adversely affects the stability of Basis, making Basis intrinsically less attractive to users. Additionally, imposing transfer restrictions on bond and share token auctions materially hurts our ability to build the Basis ecosystem.

Your snarky comment adds nothing constructive to this discussion, and lowers
the quality of discussion on hackernews.

~~~
tim333
Dunno I thought the comment was funny. Humour has value sometimes.

------
chrisco255
Maker DAI is superior in every way to Basis, and it's been in production for
over a year at this point...surviving all the wild price swings along the way.

~~~
wtvanhest
Do you know what the use case for holding stable coins is? I haven't figured
out why anyone we ould need them.

~~~
gojomo
People who'd want to spend cryptocurrency might want cryptocurrency's
advantages, without its volatility.

People who want to invest/speculate in cryptocurrency will often want some
proportion of their portfolio value to be as stable as USD. But, actually
holding true USD at exchanges/banks could be more complicated, requiring
interfacing with legacy banking systems & regulations. A stablecoin allows USD
value to be handled at exchanges (and transferred) in manners almost wholly
analogous to other cryptocurrencies.

~~~
lawn
Except these stable coins doesn't solve the core problem cryptocurrencies do:
uncensorable transactions. Tether for example has the ability to freeze
addresses. They can also freely manipulate the coin supply (a necessary
feature for stable coins) which goes against the decentralized idea of
cryptocurrencies.

~~~
wmf
AFAIK Basis and DAI are both trustless; not everything is as bad as Tether.

~~~
Nursie
DAI has some sort of emergency provision for freezing the entire chain and
returning stakes, controlled by MKR token holders, whoever they are.

~~~
chrisco255
It has a global settlement (which more or less liquidates all collateral). It
doesn't freeze the ETH blockchain that DAI are traded on. DAI could be
returned to the main contract for X amount of ETH based on the spot price of
ETH when the global settlement is executed. But DAI could still be traded
around independently of the global settlement. It's value might have slipped
as a result, however, based on whatever ETH became worth following the
settlement. The market would still determine that price, however.

------
empath75
[https://prestonbyrne.com/2017/10/13/basecoin-
bitshares-2-ele...](https://prestonbyrne.com/2017/10/13/basecoin-
bitshares-2-electric-boogaloo/amp/?__twitter_impression=true)

The worst idea in cryptocurrency.

~~~
PeterisP
That link is a quite good explanation of the core arguments.

------
jcfrei
I've had an idea floating around to generate a stable coin for a while now and
would love to get some feedback: The idea is simply that _everyone_ can mine
new "tokens" (for lack of a better word) by running a proof-of-work algorithm
and broadcasting the solution to the network (just like the block mining in
Bitcoin). In every new block all verified token generations are payed out to
the respective addresses. In the long term the value of these tokens would be
limited on the upside to the cost of the PoW algorithm. The difficulty of this
PoW algorithm would remain constant - unlike the BTC PoW algorithm which
adjusts with the hash rate.

Two issues: 1) This scheme would only work with a PoS algorithm for block
creation, because in a PoW system the security depends on the block reward
(which would be low in this system). 2) There's not really a lower bound for
the price of this token - the intrinsic value depends on it's usability for
payments.

~~~
gwbas1c
Make sure you understand economics and scalability.

The general lack of awareness of how traditional currencies are established
and maintained is just shocking.

Also, make sure you understand scalability. As much as the crypto community
likes to poo poo the Visa network; the Visa network handles an order of
magnitude more transactions per second than the current cryptocurrencies can
handle.

~~~
jerguismi
If you are seriously comparing Visa network to protocol like Bitcoin, it is
you who doesn't understand economics and scalability.

Visa network is centralized and owned a company. Bitcoin is a protocol with no
central ownership. Additionally, visa network is currency-agnostic and enables
payments in any currency they want to support. Centralized services like Visa
can work with Bitcoin in various ways, for example the settlement transactions
can be done with Bitcoin.

Additionally Bitcoin has been developed from the start with various
centralized services built around it - without those services it wouldn't be
popular at all. Any centralized service can scale as well as Visa. Though
where Bitcoin provides value is not near retail payments, and while there have
been bitcoin-reloadable visa cards I think that is not very interesting use-
case.

~~~
anthonybsd
>Though where Bitcoin provides value is not near retail payments

Where does it provide value? If it's bad as currency, what's the use case? It
certainly fails store of value test (unstable, high volatility).

------
ThrustVectoring
There's a real fundamental problem with stablecoins: any system that
effectively allows decentralized peer-to-peer transmission of money is going
to fail one or more anti-money-laundering laws. Stablecoins are fundamentally
illegal operations under US law.

~~~
bouncycastle
> any system that effectively allows decentralized peer-to-peer transmission
> of money

Congratulations! You've just described cash.

~~~
wmf
If cash was invented today it would be illegal. It's grandfathered in for now,
but new cash-like instruments aren't going to get the same treatment.

(Also, cryptocurrency is more powerful and thus more dangerous than cash
because it can be transmitted electronically and it has no volume or mass.
These differences are relevant if you consider that organized crime incurs
nontrivial costs in handling large amounts of cash.)

~~~
vasilipupkin
this is obviously nonsense. you are confusing transactions, versus operating
money services businesses. Cash is perfectly legal and so is any cash like
instrument. It's when you start operating a business that is involved in money
transmission, cash or not, that you need to register.

~~~
JumpCrisscross
> _Cash is perfectly legal and so is any cash like instrument_

See what happened to bearer bonds.

Stablecoins are inherently doomed. First, they’re trying to solve the
impossible trinity. And second, their untraceabiliry and explicit hard
currency link makes them non-compliant AML-wise.

~~~
ThrustVectoring
Even if you can make an AML compliant stablecoin, you're going to wind up with
low marketshare as you have no competitive edge against over both actual
banking and the cryptocurrencies getting used for money laundering. Like, by
the time you centralize operations enough to comply with AML laws, you want to
be using a database and an API with access tokens and resource identifiers
that you hand out to approved participants. At which point you're a fancy
bank, pretty much.

------
kaizendad
I'm extraordinarily confused as to how this was not an issue handled before
Basis got to this point. It's not a secret that regulators would like to have
purview over these types of assets, and that regulators have in fact
successfully pursued those involved in other cryptocurrencies that turned out
to be fraudulent. Of all the risks the Basis founders had to confront --
building a new technology, proving out a new algorithm, getting interest from
others, etc. -- understanding at least the threat of regulation seems like
among the simplest.

What am I missing?

~~~
leppr
The issue was handled in their SAFT with a provision that states they would
return the funds if they failed to deliver a product. Regulations on new
technologies aren't a fixed thing, they were optimistic (someone has to be).

Another theory could be that the regulation issue is a pretext. Those big
investors that bet heavily on crypto and are now in the red could have
insisted to get their money back. Given how low the sentiment about crypto
presently is, these investors are in a far better position to make lucrative
plays now, than keeping their money in a project that raised near the top of
the bubble.

~~~
kaizendad
I'm more inclined to the latter. Sure, they hedged their bets in their SAFT,
but to say "our plan involves not being regulated, and we give up if we are"
strikes me as silly.

But you're right, maybe they expected a different level of regulation than
they were ultimately going to be subjected to, and maybe they just didn't
communicate that.

Come to think of it, if I were a big bank, skilled in handling regulation, I
might absolutely give a bunch of $ to a startup in this space, knowing I'd, at
worst, own a big chunk of them, and, at best, prove out the market with
someone else's time, then get to launch myself, with my own giant regulations
team behind everything.

But that's probably paranoid.

------
Animats
Neither the article nor the Basis site answers the important question: do coin
buyers get their money back, and if so, how?

------
mrnobody_67
This is ultimate proof that so called "smart money" is often lazy and dumb.

Plowing $133m into a bad idea based off a white paper, when anybody could have
told you it'd inevitably implode based on common logic outlined by others in
the comments here....

~~~
QML
In other words, really smart people can make really dumb investments.

