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Introduction to Basecoin- Basecoin V/s Tether USDT

  • Akshit Anthony
  • Nov 17, 2021
Introduction to Basecoin- Basecoin V/s Tether USDT title banner

Based on the idea of keeping a stable price, Basecoin is a cryptocurrency that was released in 2018. At the time of its introduction, it was pegged to the value of the United States dollar (USD). 


To give investors a stable store of value that is not susceptible to the significant price volatility than other cryptocurrencies, such as Bitcoin, are prone to, Basecoin was established. 


Due to a request by the Securities and Exchange Commission of the United States, the cryptocurrency Basecoin (now known as Basis) was shut down in December 2018. 


(Related Reading: What is the Future of Cryptocurrency?)


How Basecoin works?


Basecoin was developed by three former Princeton classmates, Nader Al-Naji, Josh Chen, and Lawrence Diao involved in the cryptocurrency industry. A stablecoin is one whose value can be traced back to another asset, which is what Basecoin's tickets are marketed as being in the case of cryptocurrency. 


This kind of cryptocurrency, known as a stablecoin. These three former Princeton classmates developed to lessen the large price fluctuations — also known as volatility — that many cryptocurrency exchanges are subjected to daily.


 In addition to the United States dollar (USD), a single Basecoin may be attached to a basket of assets, such as the Consumer Price Index (CPI), among other things (CPI). 


This index tracks changes in the prices of a basket of consumer products. It serves as an indicator of an economy's pace of price rise, known in the United States as the inflation rate.


When it first got launched, it was pegged to the value of the United States dollar. Assuming that a BASE is worth a dollar in the United States, this would be true of every other country in the world.


It was not easy to ascertain the current market value of the currencies created due to the Basecoin protocol's adoption because of its decentralized nature.


(Must Check: Introductory Guide to Decentralized Finance (DeFi))


These are the following distinct tokens that were used to accomplish the goal:


  • Basecoin

  • Base Bonds

  • Base Shares


Base Shares were held by persons who made early investments in Basecoin. However, they were not the same as stocks. You can further check out our blog to understand the difference between stocks and bonds.


The Base Bonds were not traditional bonds or debt instruments. Instead, they were more analogous to options and futures contracts, both of which are derivatives because the value of their underlying asset is generated from that asset. 


You might want to read more about different types of bonds. You can check our blog on different types of bonds.


Suppose the value of a token rises above one dollar. In that case, Basecoin will transfer additional tickets to holders of Base Shares to make up for the difference. Holders of Base Shares will be permitted to sell their shares, rather than the general public being offered the opportunity to buy them. 


The purpose of taking this step was to increase overall supply until the value of one Basecoin equals the value of one US dollar (USD).


Suppose the value of a token falls below the value of a dollar. Since it was a first-come, first-served basis for the conversion, it will permit early investors to receive their payouts before late investors.


(Related reading :  Bitcoin Future ETF - All you need to know)



Additional Estimates


Based on what has already been disclosed, Basecoin claims to be the world's first stable coin. However, Bitshares, which announced the existence of a stable currency in 2014, claims to be the world's first stablecoin.


(Must Check: All about Revenue Deficit)

A disparity between what the market believed pegged currencies were worth and what central banks reported caused this to happen. The reserves are drained due to attempts to make up for the discrepancy, which ultimately contributed to the company's global abandonment in the 1970s.


(Related blog : The Federal Reserve & its Working Mechanism)



What went wrong with basecoin?


Ever since its culmination bitcoin has been on the danger radar. Several economists have called attention to Basecoin's economic theory flaws.


The great Economist, Cochrane explains that central banks frequently regulate the money supply by purchasing and selling financial instruments. 


A significant bank purchases assets from financial institutions such as banks and other financial institutions to increase the amount of money in circulation. It does not issue its securities; instead, it licences them from third parties. 


As we are diving into the bitcoin-blockchain realm, you might want to read more about how blockchain is transforming the financial industry. 


Basecoin, on the other hand, created a system in which Base Bonds covered price drops. It had no value because they were supposed to be as liquid as Base Shares and the coin itself, and hence had no value. 


Based on Cochrane's predictions, bitcoin buyers will quickly discover that bonds cannot pay more interest than money in a liquid market. 


(Related Reading: Ultra-short Bond Fund- Everything You Need to Know)


And it also claims that in the future scenario it cannot be used as back money in the face of competing currencies analysts.


The Great Economist Cochrane phrased it another way, "I find it fascinating how the Bitcoin community appears to be painfully learning centuries-old facts in monetary economics".


 Basecoin achieves its goal of reducing bitcoin volatility using a self-referential strategy. This process is done by pegging the coin to a commodity.


(Related reading : The Federal Reserve & its Working Mechanism)



Basecoin V/s Tether (USDT)


It is important to note that Tether (USDT) is a fiat-collateralized stablecoin, backed by a fiat currency - the United States dollar to retain its value. To act as collateral for the money it has created, Tether keeps a stockpile of dollars, known as reserves, that it can draw. 


The funds are held in the custody of a financial institution not affiliated with the Central Bank of the United States. Because it is tethered to the dollar, the value of a tether is roughly equal to one dollar in terms of purchasing power.


Even though Basecoin had no fiat currency reserves, the cryptocurrency committed to altering its currency supply in response to fluctuations in its exchange rate vs dollars.


(Related readings : Why should we invest in Semi Fungible Crypto Token?)



The Regulation by Securities and Exchange Commission (SEC) and Basecoin Shutdown


Basecoin was renamed Basis in 2018, following an announcement made at the time. While it was one of the most well-funded coins in that year, its prominence drew the attention of government regulators.


 It was mainly the Securities and Exchange Commission (SEC) when an intitial coin offering had generated and destroyed fortunes throughout the world. 


According to the letter signed by the business's CEO, Nader Al-Naji, on December 13, 2018, the company will reimburse investors' money. It will phase down Basecoin over the following year.


 Al-Naji argues in the letter that Basecoin's method is unworkable in light of the Securities and Exchange Commission's (SEC) requirements to "impose transfer restrictions on bond and share tokens". 


(Related readings : What are Derivatives & How are They Used?)



Key Points on Basecoin


  • Basecoin was a cryptocurrency that was developed in 2018 and was based on an underlying security. Its creators claimed that by pegging the coin to the underlying security, they could reduce market volatility.

  • As a result of the plan, both crypto enthusiasts and economists expressed their displeasure, stating that it misrepresented the process of guaranteeing a currency's value.

  • According to an announcement made by the inventor of Basecoin in December 2018, Basis, the parent company of Basecoin, announced that it would cease operations and refund investors' funds.

  • Between 2016 and 2019, Basecoin's history reveals how investors became entangled in the Crypto phenomenon.

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