An all-star cast of investors has backed a little-known startup behind a token called basecoin.
Scheduled to debut with a white paper release on Tuesday, the project, the first from Intangible Labs, boasts investors including 1confirmation, Andreessen Horowitz, Bain Capital Ventures, Digital Currency Group, MetaStable Capital, Pantera Capital and PolyChain Capital.
Hailed as an evolution of the "stablecoin" concept, basecoin is lauded by investors for its unique approach to what's been called the "holy grail" of cryptocurrency - a digital asset able to keep its value free from volatility. A draft white paper obtained by CoinDesk details the concept, which outlines a blockchain with the built-in "brains" to manage monetary policy.
At a high level, the idea is that the basecoin protocol can be pegged to the value of any asset or basket of assets, dynamically adjusting its market price through the creative use of a combination of tokens.
As explained in the white paper, the idea is that the protocol would be set up to mirror an asset or an index, say the U.S. dollar or the Consumer Price Index, at which point it would use oracles (links to trusted, external data sources) to monitor exchange rates. The protocol would then automatically expand or contract its supply of tokens to maintain its value.
Polychain's Ryan Zurrer hailed it as an "elegant system," with other investors heralding that the idea could have both short and long-term implications - in the near-term, providing an alternative to fiat currencies for crypto traders, and in the long run, serving as a tool for maintaining the stability offered by today's centralized monetary systems.
The former problem was one addressed by Joey Krug, the founder of Augur and a Pantera partner, who spoke to how basecoin could ease issues he's faced as a developer.
"One of the problems this space faces is volatility; no one is going to want to use Augur if you're right about a prediction, and the price of the reward goes down overnight," he told CoinDesk.
Indeed, Intangible Labs founder Nader Al-Naji, who quit his job at Google in July to pursue the project, described stability as the main benefit the protocol would bring to the market.
He told CoinDesk:
"Bitcoin and the other cryptocurrencies are a bit of a playground for speculation, and that speculation is undermining cryptocurrency use as money. The fact that it's volatile and that there's speculative value is a blocker to mainstream adoption. We tell people we're trying to be used as medium of exchange."
In this way, the cryptocurrency project is notable given the extent to which the basecoin team - comprised of Al-Naji, as well as fellow Princeton graduates Lawrence Diao and Josh Chen - draw inspiration from traditional finance.
"Basecoin would present the world with both the technology and the opportunity to develop an independent, transparent and potentially more stable monetary policy than anything that's ever been possible via central bank," the white paper reads.
According to Al-Naji, the company has still to determine how it would launch the protocol - namely, if individual protocols would be needed for each stablecoin, or if a single version of the blockchain could manage many different types of fixed-cost assets.
Either way, investors are keen on a share of the coins, in whichever version they appear. Intangible Labs is said to have completed a small and highly competitive capital raise, and will soon be opening a pre-sale of its coin.
An original version of its draft white paper indicated the startup is also considering an initial coin offering (ICO) as part of its release, though those involved declined further details.
Three tokens in one
But, that's not to say any sale would even be limited to a single cryptocurrency.
As outlined in the white paper, basecoin aims to differentiate from past iterations of the stablecoin concept by using a combination of tokens to replace the centralized management that has been needed to maintain their stability.
The basecoin team, for example, took aim at Tether in its paper, itself recently the subject of criticism for fluctuations in its U.S. dollar peg. "Tether's $400 million market cap proves the need, but it is also completely incapable of serving it long term," the paper asserts.
Most interesting about the critiques, though, is that the basecoin team offers what appears to be a novel take on how a better system could be achieved.
Namely, to regulate the supply of its tokens, the basecoin protocol itself is made aware of the market capitalization of its cryptocurrency, the demand for the coin and the number of coins in circulation. Further - as the different tokens are used to offer different incentives - they seek to naturally create an equilibrium that keeps the price stable.
The first - basecoin - is the cryptocurrency that powers the system. Pegged 1-to-1 with the value of the U.S. dollar, it serves as the most user-facing of the three tokens, in that it's the one exchange traders and other users would interact most directly with.
The second and third cryptocurrencies, "base bonds" and "base shares," are those that underpin basecoin. Base bonds are tokens to be auctioned off programmatically by the blockchain when supply needs to be reduced, and these will expire within a time frame to encourage redemption.
"When you buy a bond you pay for it with coins, which get taken out of circulation, decreasing supply. And the reason why you like that bond is that it converts back into coin at some point in the future. You're hoping in the future you'll get back a return on what you put in, you want your coin principal plus some coin interest," Al-Naji explained.
Base shares, on the other hand, provide a fixed-supply cryptocurrency that does not have a peg.
Rather, they gain value through a dividend policy, whereby holders receive new basecoins that are created if and when the token supply needs to be increased.
Work to go
As for how these coins will be managed, however, that remains less clear.
Al-Naji said that the team is now working on a "yellow paper" that he estimates is about "80 percent" complete and that will detail the technical specifications of the basecoin blockchain, including aspects such as how mining will function and how consensus will be reached.
In contrast, Al-Naji framed the three different tokens that will underpin the protocol are more mature in ideation. Going forward, he said that the team is also working on a "robustness analysis" that will showcase the conditions under which the tokens can be expected to maintain their desired stability.
"You can think of this as economic research. It aims to prove this actually works and that the pegs stays put no matter what under the assumptions," he said. "That's really mature."
Still, taken together, Al-Naji was keen to portray the project as not simply another token built amidst the recent ICO craze. Al-Naji said that he has been studying bitcoin since 2012, when he began considering how to apply monetary theory to the technology.
The end result, he said, is a sophisticated take on how public distributed ledgers and tokens could come to replace some of the more advanced aspects of the current monetary system, which he framed as corrupt due to human error.
"The key thing that we're doing is that there's no central authority. This is totally decentralized, even the exchange rate is decentralized via oracles, which makes it extremely difficult to corrupt the supply of money. It's a much more robust way to do the policy," he said.
Given these weaknesses, the authors go so far as to predict basecoin could "displace U.S. dollars in transaction volume" due to the fact that it would (in a sense) leverage the Federal Reserve's work on maintaining a stable asset to bootstrap its value.
It also projects that, should its peg prove reliable, the protocol could be used for "salaries, loans, futures contracts, options contracts and more."
Far from far-fetched, the authors believe they are likely to find a large market of cryptocurrency traders eager to act as early adopters, which will provide an onramp into other markets.
In line with criticisms about the sector from thought leaders, the authors think basecoin could one day even be adaptable to serve a similar function as central banks.
The paper concludes:
"In this future world, governments would do well to support cryptocurrencies that are stable in the face of macroeconomic upheaval. In fact, citizens may even demand it."
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Intangible Labs.
Image via Basecoin website