On December 13, Frank Chapparo at The Block reported that Basis, a crypto stablecoin project that raised around $133 million in April, is terminating its operations and is in the process of returning the capital it raised to its investors.
The project was funded by some of the largest venture capital firms in the technology space including Andreessen Horowitz and Bain Capital Ventures, a private investment firm with over $100 billion in assets under management.
Possible Reason Behind the Struggle
This year, a handful of high profile stablecoin projects like Circle’s USD Coin, Gemini’s Gemini Coin, and Paxos’ PAX debuted with listings on major cryptocurrency exchanges. For the first time since 2014, investors in the digital asset market have been provided with fully audited, backed, transparent, and regulated alternatives to Tether (USDT).
Since the early days of crypto, a criticism toward Tether has been its lack of transparency, full audits, and its banking partners. Investors showed a decline in confidence toward the stablecoin, which eventually led companies in the likes of Circle to enter the stablecoin market.
Basis employed a drastically different approach than other major stablecoin projects in the market. Rather than obtaining banking partners and obtaining capital to represent the amount of U.S. dollar held by its investors, it decided to incorporate a complex algorithm to maintain its 1:1 peg with USD.
In essence, Basis maintains a stable price by decreasing and increasing its supply amidst market volatility. The project buys back Basis tokens if the price drops and expands the supply when the price increases.
As the team explained:
“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.”
The problem the project may have faced with regulators in the U.S. market, which still remains unknown, is that there is no tangible evidence to prove that the asset’s 1:1 peg with the U.S. dollar can be maintained.
While the project attempted to employ an innovative solution to fix the volatility issue in crypto for both institutions and inviduals, in the current state of the market wherein regulators are still not definitively clear on how to approach cryptocurrency regulation, such projects could run into legal conflicts.
Su Zhu, the CEO at Three Arrows Capital, said that venture capital firms prematurely supported the concept of Basis without a functioning prototype, failing to measure the risks involved in running such a concept. He said:
"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."
Could More Projects Follow?
Multi-billion dollar firms like PwC have said in the past that existing regulatory frameworks are preventing blockchain projects and crypto companies from expanding the space and evolving the technology surrounding it.
“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.”
For the foreseeable future, crypto projects that are challenging to audit, monitor, and govern are likely to face similar issues as Basis especially in regions like the U.S. that are strictly regulating the cryptocurrency industry.
Featured image from Shutterstock.