Algorithmic Stablecoin: A Zero-Sum Game Between Algorithm and Humanity
The appearance of Basis Cash offers a different definition, which maintains BAC, its native token, to stay at around $1 via a flexible supply mechanism to make Basic Cash (BAC), Basis Bond (BAB), and Basis Share (BAS) pegged with both market and algorithm.
IOSG Ventures, a venture capital firm centered on the crypto market, made an exact analogy — regarding BAC, BAB, and BAS as dollar, dollar bonds, and stocks respectively.
Theoretically, if BAC trades more than $1, the system will proliferate a portion of BAC via algorithm to restrain the price, and BAS holders could gain BAC rewards; while BAC trades below $1, users could buy dip BAB (Bond) with BAC and gain space to make profits, meanwhile, BAC would be burned and form a deflation effect to force the price to rally.
Unlike USDT and DAI, Basis not only maintains decentralization but also requires no assets staking. It intends to utilize the profit-oriented humanity to mint stablecoin via market and algorithm.
Many regarded it as monetary reform, however, some also believe the three tokens of algorithmic stablecoin do not have full redemption and profits support, but rather depending on the subsequent fund's influx — seeming to be kinds of Ponzi.
The more ridiculous thing in seeking to stabilize token price via algorithm is that people’s greed and fears generally resulted in the instability of stablecoin, leading its price to be higher or lower than $1.
However, with the popularity of Basis, a number of copycats appear in algorithm stablecoin, among which some are questioned that their developer group escaped with no one taking any care of them after dropping below $1.
Algorithmic stablecoin is also double-faced, covered with applaud and questioning. Behind the popularity, will the algorithmic stablecoin be further acceptable? It still needs to experiment.
The popularity of basis makes algorithmic stable to trigger a new wave of DeFi
Decentralized finance, or DeFi recently outperformed by major cryptocurrencies, recently seemed to get the upper hand, although the leading project is not the “Old DeFi” like Uniswap and Compound, but rather the algorithmic stablecoin like Basis Cash.
Basis intends to mint stablecoin pegged with $1 via algorithm-driven token supply mechanism, differentiating with the familiar USDT and DAI.
USDT, launched by its centralized entity Tether, maintains essentially each coin pegged with $1 via reserving funds like the dollar in the bank. Its shortcoming is obvious: the potential over-launch resulted from the non-transparency of Tether’s actual fund’s reserve and the hovering regulatory risk on USDT.
In addition, DAI produces stablecoin via staking tokens like ETH on Ethereum network, more decentralized than USDT and a stronger capability against regulation.
Basis adopts an unprecedented means to ‘redefine’ stablecoin. There are three parts to the Basis system, Basis Cash (BAC), Basis Bond (BAB), and Basis Share (BAS). BAS is pegged with $1; BAB is like a bond; and BAS is equal to shares of the issuance entity, all of which are designed for the purpose “one BAC equals to $1”.
The interface of Basis Cash.
BAC and BAS are produced via staking mining and liquidity mining. The supply of initial mining will be restricted, which results in the BAC price is far beyond $1 at the beginning of launch. While token supply rebases, the system will proliferate a portion of BAC to make BAC back to $1. The first algorithmic stablecoin AMPL adopted such a mechanism.
Unlike AMPL, when BAC trades below $1, users could buy BAB via BAC. Moreover, the price of BAB is set to be the second power of BAC, for example, BAC trades at $0.9, BAB at $0.81 — equivalently a discount. The BAC serving as a currency will be burned, completing a deflation effect.
If consequently, BAC surged above $1, users’ BAB could exchange to BAC with 1:1 ratio, which produces a price gap for users to make profits.
The other token BAS serves as shares, which could be produced via providing liquidity for BAC-DAI and BAS-DAI, which could exercise after the proliferation of BAC. Each time BAC proliferating, the system will firstly recompense the bond, as users could exchange the newly-proliferated BAC with BAB at 1:1 ratio; the rest BAC will be the dividend, allocating to BAS holders.
A cycle puts into effect in this system.
Users who want to gain BAS is required to get involved in liquidity mining, while mining also requires them to buy in BAC or BAS, which in turn adds the demand for both.
After BAC trades higher than $1, BAS holders could gain the reward, if lower, a deflation will appear, and the issuance of BAB will allow users a space to make profits. Basis adopts this method to make sure BAC trading around $1.
As the analogy of IOSG Ventures, the system is similar to the US dollar system.
The risk behind
As per IOSG Venture, algorithmic stablecoin like Basis is featured with decentralization and anti-censorship. It creates a unique method that requires no asset staking and is likely to firstly complete truly decentralized stablecoin via fully using profit-oriented humanity, market, and algorithm.
In the current crypto market, participants have realized the strong demands of stablecoin on exchanges and blockchain. However, current stablecoins are bothered by a variety of shortcomings, including USFT’s non-transparency and weak anti-censorship and DAI’s low fund’s utility rate resulted from the locking. Basis seems to be a new direction.
Some in the industry believe algorithmic stablecoin and algorithmic compounded asset have a great potential to be largely adopted and even be the choice for the mainstream with the centralized stablecoin suffering a stricter regulation.
However, algorithmic stablecoin like Basis is still under the experimental stage, the ideal adjustment mechanism cannot catch up with the real environment. For example, liquidity mining proliferated with the incentive of the fruitful reward and eventually ended its bubble stage. Despite experiencing a couple round of rebase, many algorithmic stablecoins are still trading above $1, which make itself extremely unstable.
If the reward going down or disappearing, or no new fund influx, algorithmic stablecoins may show systematic risk, for example, when an algorithmic stablecoin dropped below $1, the market won’t allow the exchange to bond but rather a direct sell-off, which may lead the coin to the dreadful whirl — a dramatic slump.
Example shows as BCC, the copycat of Basis Coin, has dropped to around $0.5. It is rumored that its founder group has extracted the profits and escape. Following the disappointment in the market, the end is undoubtedly an escape with funds, as its ‘self-balanced’ system was damaged.
Despite being compared with the U.S. dollar by IOSG Ventures, Basis is relatively different from the top fiat currency, since the token has no enough full redemption and profits support and completely depends on the consequent fund’s influx. Therefore, despite considering this currency flexibility, such flexibility also depends on the Zero-Sum Game.
Algorithmic stablecoin indeed brings a new trend for decentralized finance, however, it is also under the trail with some shortcomings. Will it bring a new boom in 2021? Let’s wait and see.