Basis/Basecoin is a Bob Rubin Trade

  1. Sell a so-called ‘stable’ asset with significant hidden tail risk
  2. If things go well, collect short-term profits
  3. If/when things go bad, exit the market ⇒ losses left with ‘stable’ asset holders
Photo by Patrick Neufelder on Pixabay

How Basis proposes to work, and how it can fail

  • Should the price increase above the target, the system creates new coins to increase the coin supply until the price regains an equilibrium around the target. These new coins are awarded as dividends to stakeholders in Basis (owners of their investment tokens), who can then sell them on the market.
  • Should the price decrease below the target, the system attempts to sell bond tokens that incentivize stablecoin holders to destroy their stablecoins in exchange for future interest, which acts to decrease the money supply and bring the equilibrium price back in line with the target. This bond interest is paid the next time the system mints new stablecoins to increase the coin supply (importantly, this is not guaranteed to happen).
  1. The stablecoin is subject to catastrophic failure. The bonds are in fact very risky derivatives. If the market for these dries up, as is prone to happen during extreme events, the stablecoin collapses. Thus any growth in the Basis system is likely to be transient.
  2. Any profit from transient growth in the system is purely extracted by investors when they receive and sell new stablecoins. Stablecoin holders have no claim to the value of this growth as there is nothing collateralizing the coins. This is especially important if/when the stability fails. This fulfills the ‘Bob Rubin trade’ as there’s no reason to think the growth is lasting.

Attempts to patch the problems fail

  • The price floor just means that the mechanism stops working entirely. If this is invoked, there was something causing massive downward pressure on the stablecoin price in the first place. As the bonds were the only mechanism addressing this, the price can continue decreasing.
  • The expiration of older bonds will indeed tend to make new bonds more attractive. However, as a consequence, the expiration makes all bonds less attractive. These bonds are already very risky derivatives; this just makes them more risky. And so the market for them will dry up even faster during extreme events.

Basis is a repackaging of an idea that has already failed

Source: Coinmarketcap

The stablecoin space going forward

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PhD student @ Cornell University, Twitter: @aklamun

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Ariah Klages-Mundt

Ariah Klages-Mundt

PhD student @ Cornell University, Twitter: @aklamun

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