DEFINITION of 'Basecoin'

Basecoin is a cryptocurrency whose protocol is designed to keep its price stable. Basecoin launched with its value pegged to the U.S. dollar.

BREAKING DOWN 'Basecoin'

Basecoin labels its tokens as “stable,” meaning that its value is pegged to another asset. This approach seeks to reduce the high price volatility that many cryptocurrencies experience.

A single Basecoin can be pegged to the USD, a basket of assets, or an index, such as the Consumer Price Index (CPI). At launch, it used the U.S. dollar as a peg. The company claims that it can algorithmically adjust the supply of its tokens based on the exchange rate between it and the peg. This means, for example, that one BASE will always be worth one USD.

Basecoin is not the first company to claim to have a stable coin, as Bitshares attempted this with BitUSD in 2014. That venture was not successful. The central banks of developed countries abandoned one of the more famous currency pegs, the gold standard, because they were no longer able to maintain the peg. This occurred because there was a mismatch between what the market thought pegged currencies were worth and what the central banks said they were worth, and making up for this difference was eating through reserves.

The Basecoin protocol is decentralized, which makes it difficult to verify how the market is valuing its tokens. It has to rely on data provided by third parties, and will adjust the amount of tokens it issues based on how the market values them. It does this using three different tokens:

  • Basecoin
  • Base Bonds
  • Base Shares.

Base Shares are held by investors who bought into Basecoin early on, but are not the same as stocks. Base Bonds are not the same as bonds, and instead are more similar to an option or future.

If the value of a token is higher than a dollar, Basecoin releases more tokens to holders of Base Shares. It does not release them to the open market directly, and instead allows Base Share holders to sell the tokens. This roundabout approach is supposed to increase the overall supply until the value of one Basecoin returns to parity with the USD.

If the value of a token is lower than a dollar, Basecoin releases Base Bonds, which can be converted to into Basecoin once Basecoin reaches parity. This conversion is done on a first-come, first-serve basis, meaning that early investors are able to cash out before later ones.

Claims Of Stability Criticized

Basecoin’s claim that this three-pronged approach to managing token value is similar to how central banks operate has been met with skepticism. In some cases, the whitepaper outlining how Basecoin functions confuses fiscal policy with monetary policy.

Central banks typically manage the supply of money by buying and selling securities. If a central bank wants to increase the quantity of money in circulation, it buys securities from banks and other financial institutions. It does not create its own securities.

The success of Basecoin’s three-pronged approach is highly dependent on how much investors trust the company. This is because the mechanisms – Basecoin, Base Shares, and Base Bonds – and their relative values are all controlled by Basecoin. Central banks do not issue their own bonds, as Basecoin does with Base Bonds, or rely on third-parties (holders of Base Shares) to manage supply.

In order to remain successful, Basecoin has to continuously attract investors who will exchange hard currency for the tokens of earlier Basecoin investors. This has been criticized as similar to a Ponzi scheme. (See also: Former Bitcoin Exchange Operator Arrested: SEC Charges Him With Fraud.)

RELATED TERMS
  1. Tokenized Equity

    Blockchain-based tokenized equity offers the advantages of a ...
  2. Simple Agreement for Future Tokens ...

    Simple Agreement for Future Tokens is an investment contract ...
  3. Unikrn

    Unikrn is the operator of an eSports betting platform that uses ...
  4. Currency Peg

    A currency peg is an exchange rate policy that "pegs" a country's ...
  5. Bounty Programs (ICO)

    Bounty programs are rewards, usually in the form of tokens, to ...
  6. Initial Community Offering

    An initial community offering is an initiative under which a ...
Related Articles
  1. Tech

    Is 2018 the Year of the Security Token?

    With its ability to demonstrate value, security tokens could roil traditional financial markets in favor of the more hybrid blockchain models.
  2. Tech

    What is ERC-20 and What Does it Mean for Ethereum?

    Of all of the different token types available on Ethereum, ERC-20 has gained special prominence among developers.
  3. Tech

    Why Did The SEC Single Out Ether?

    An SEC official yesterday said that ether is not a security. Why did the agency, which has threatened to impose securities regulation on ICO tokens, clarify ether's status and not that of other ...
  4. Tech

    Cryptocurrency 'Burning': Can It Manage Inflation?

    Coin burning could help to control the circulating supply of digital tokens.
  5. Tech

    The Rise of 'Initial Coin Offerings'

    A growing trend sees more digital tech companies creating their own currencies. What is in store for this developing industry?
  6. Tech

    SEC Chair Says Bitcoin Is Not A Security

    SEC Chairman Jay Clayton told CNBC that bitcoin is not a security. But he was not as forgiving about ethereum's tokens.
  7. Tech

    20% of All BTC is Lost, Unrecoverable, Study Shows

    Users may have misplaced or lost 20% of all BTC.
  8. Tech

    A Crypto Primer: Currencies, Commodities, Tokens

    Here's a brief primer on the differences between cryptocommodities, cryptocurrencies, and crypto tokens.
  9. Tech

    Why Crypto Users Need to Know: The ERC20 Standard

    ERC20 dictates the standard functions that ethereum token contracts must be able to execute.
  10. Tech

    Crypto Exchanges Accused of Inflating Trade Volume

    Cryptocurrency exchanges reward users with unique tokens for transacting.
RELATED FAQS
  1. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
Trading Center