The Block’s Frank Chapparo reported on the 13th of December that Basis is ending its operations after raising about $133 million in April for its stablecoin project and will be returning the raised capital to its investors.
Funding was received for the project from some big venture capital firms focused on the tech industry like Bain Capital Ventures, a company with more than $100 billion in funds under management and Andreessen Horowitz.
Likely Cause of the Problem
This year saw the debut of few important stablecoin projects like Gemini Coin, USD Coin, and PAX, which became listed on top crypto exchanges. Investors in the cryptocurrency market have enjoyed transparent, fully audited, regulated and backed Tether (USDT) alternatives, something that has not happened since 2014.
From the very beginning of cryptocurrency, Tether has been criticized for its lack of full audits, banking partners and transparency. The confidence of investors towards the stablecoin declined, and this prompted other companies like Circle to go into the stablecoin market.
Unlike other top stablecoin projects in existence, Basis adopted a complex algorithm to ensure that its 1:1 USD peg is maintained, instead of acquiring banking partners as well as capital to depict the US dollar amount its investors held.
What this means is that Basis sustains its price stability by increasing and decreasing its supply in the midst of market volatility. Basis tokens are repurchased by the project during a price drop, and when there is a price increase, the supply is expanded.
As explained by the team:
“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. The contracted supply is designed to restore Basis price.”
Unverified Claims, Not Good For Business
Since there is no real evidence to show that the 1:1 USD peg with the asset can be maintained, it is possible that the lack of proof caused a problem with the US market regulators.
While efforts were made by the project to bring a solution that will end crypto volatility both for individuals and institutions, in such a time as this whereby regulators are yet to take a stand on cryptocurrency regulation, legal conflicts may be encountered by such projects.
Three Arrows Capital’s CEO, Su Zhu, stated that the support given to the Basis concept by venture capital firms was premature as the firms failed to calculate the involved risk of operating such concept and also that the concept had no functioning prototype.According to Zhu:
“Raised funds without a functional prototype or basic game theory stress testing. Any algorithm stablecoin generates a massive attack surface that is very difficult to reason through in a short amount of time. Instead of building a community and letting them poke holes, VCs FOMOed in.”
Is There Room For More Projects?
In the past, firms worth billions of dollars like PwC have expressed that present regulatory frameworks are hindering the expansion and development of the crypto industry and technology by crypto companies and blockchain projects.
Steve Davies, blockchain head at PwC expressed in the past that:
“Businesses tell us that they don’t want to be left behind by blockchain, even if at this early stage of its development, concerns on trust and regulation remain. Blockchain by its very definition should engender trust. But in reality, companies confront trust issues at nearly every turn.”
In years to come, digital assets projects that are difficult to monitor, govern and audit will probably have the same problems Basis had particularly in territories like the USA that have strict cryptocurrency industry regulation.