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"Case: Basis
Collateralization Ratio: 0
Collateral: No collateral
Pegged Currency: US Dollar
This type of stablecoin system gained popularity with a stablecoin called Basis (formerly known as Basecoin). Its economic system consists of three cryptocurrencies:
- Basis: The stablecoin pegged to the US dollar at a 1:1 rate.
- Basis bond: Bonds.
- Basis Shares: Governance tokens.
When the price of Basis falls below $1, shareholders burn Basis to obtain bonds. When the price of Basis rises back to $1, they can redeem Basis at a 1:1 ratio.
For example, if the initial price of Basis is $1, and demand for Basis falls by 20%, the price will drop to $0.8. The number of Basis bonds can be calculated based on the quantity theory of money as follows:
- Demand before = $1.00 * X (X = 100, representing the amount of Basis currently in circulation)
- Demand after = $0.80 * Y (Y = the target amount of Basis)
- Demand before = Demand after
- $1.00 * 100 = $0.80 * Y
- Therefore, Y = 100/0.80, Y = 125
This means that when Basis is exchanged for 25 newly minted bonds, Basis is burned to limit its supply in the short term and bring its price back to $1.
Bonds in this system are similar to a mix of options and futures contracts. Like options, Basis bonds have a strike price, but they also resemble futures contracts to some extent because they are a contract issued to bond buyers, allowing them to obtain Basis stablecoins at a specified time and price.
However, unlike the bonds issued by the Federal Reserve (which are perpetual), Basis bonds have a 5-year expiration date and are publicly auctioned on the blockchain, freely traded, and incentivize speculators to purchase them quickly to speed up the Basis monetary system's return to its fixed exchange rate.
Advantages:
- Bond redemption stablecoin systems have collateral efficiency and do not need to increase long-term supply when creating short-term demand. This allows them to increase the price of their stablecoin in the short term.
- Bond redemption differs from the interest rates used in flexible supply stablecoin models. It does not lead to a net increase in the stablecoin supply, meaning that when Basis Bonds are redeemed, the supply of Basis stablecoins does not increase.
Weaknesses:
- Shareholders in the bond redemption stablecoin model can only profit by believing that there is sufficient demand for the stablecoin and artificially creating demand to increase its price, which may lead to short-term price volatility.
- Bond redemption may leave investors with worthless bonds if the stablecoin's demand does not continuously grow. If the price of the Basis stablecoin falls far from its peg, most speculators may lose confidence in their ability to maintain the peg, making the bonds essentially worthless.
- Sharp drops in the price of Basis stablecoin can create a negative feedback loop. If speculators avoid buying bonds, it can further reduce the price of the stablecoin. This cycle may continue until all speculators lose interest in buying bonds, effectively shutting down the entire stablecoin system.
- It may not be able to maintain price stability in the short term through bond purchases. Compliance issues further exacerbate this problem. The U.S. Securities and Exchange Commission (SEC) classified Basis Shares and Bonds as unregistered securities, which can only be purchased by accredited investors and resold to the public after one year from the initial issuance. Due to its inability to comply with U.S. securities laws, Basis had to shut down its operations." |
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Post time 4-10-2023 13:20:08
