How does Basecoin (Basis) achieve price stability?
Basecoin's founding team is very technically strong and all three graduated from Princeton University in computer science but are slightly weaker in terms of monetary economy. Their algorithm relies on three tokens.
Basecoin also known as Basis is a system token used as currency; Base Bonds which is a bond currency but looks similar to a binary call option rather than a bond it has a five-year maturity and will be auctioned to shrink the currency supply. When the algorithm decides to increase the supply it can be exchanged in order; Base Shares which is a stock token has a fixed supply and will receive interest after all the bonds have been paid off.
In order to shrink the supply of tokens the Basis blockchain issues and sells bond coins to reduce the supply of Basis. These bonds can be exchanged for 1Basis when they expire and generally less than 1Basis at the time of sale (Translator's Note that is the base token holder can purchase the bond currency through less than 1basis and the premium can be realized when redeeming). This continuous "public auction system" allows Basis holders to specify specific orders such as each bond currency purchased at 0.9Basis. When the money supply needs to be tightened the highest bid order is prioritized and the minimum bid order is partially fulfilled and the auction continues until a certain amount of token supply is eliminated. The agreement sets a bottom line for bond currency prices and a bond currency cannot be lower than 0.1Basis.
In order to increase the supply of tokens the basic blockchain will create N quantities of Basis (Basecoin) new tokens. These new tokens will first be repaid to bondholders in order and the bonds will usually be repaid in proportion. If there are any remaining these new basics will be assigned to the holder of the equity currency. That is it will give priority to creditors and secondly consider equity holders.
Examples of this in practice are as follows
Suppose there are 500 bond coins in the bond currency sequence 200 of which were issued five years ago. At the same time assume that the existing 1000 coins are in circulation.
Suppose the system needs to issue 1000 new Basis tokens.
The system automatically invalidated the 200 old bond coins leaving the remaining 300 bond coins in the sequence. If the system requires less than 300 new tokens redemption of these old tokens is sufficient. However the system needs to issue 1000 new tokens so the 300 old coins will be redeemed first.
The system also needs to create another 700 Basis tokens. So the system distributes the 700 tokens equally to the 1000 coins. So every coin will receive 700/1000 = 0.7 Basis tokens. If you hold 100 coins you will receive 70 Basis in this expansion of the new token.
Will the Basecoin (Basis) protocol really work?
There is no doubt that this is a very interesting concept. However it will also cause some problems. First of all if people want to buy these bond coins they only happen if they expect the token to be preserved that is they believe that Basis will retain its value. Basis did not explain to investors and holders how it responded to currency risks. As you can imagine Basecoin tokens may look like this
1.Basis (Basecoin) fell below $1 for example $0.75. The Basis agreement will initiate a request for tighter money supply.
2.Basis blockchain issues new bond coins in an attempt to reduce Basis liquidity.
Investors will be concerned about further depreciation which in turn will require ultra-high yields on new bonds and close the bid to the bottom line set by the Basecoin (Basis) agreement. Assuming that interest rates are affected by the yields of these bonds (which is not mentioned in the white paper these bonds are basically similar to virtual treasury bonds) borrowing costs may soar in the currency sector. The bottom line price set by Basis is $0.10 which means that a 90% interest rate can be reached and $1 is needed to repay $1. Imagine a risk-free government bond rate of 90%.
High borrowing costs mean that growth may be severely constrained. A further decline in investor confidence in the currency sector requires basics to continue to tighten which will lead to continued devaluation. In the field of algorithms there is no mechanism to prevent the loss of such trust; thus no matter how tight the supply once confidence is lost it will lead to a "depreciation" spiral which may also be related to high inflation. If it is completely decentralized outside the scope of the agreement without the intervention of the central bank the necessary measures cannot be taken.
Second the Basecoin white paper did not elaborate on the actual operation of monetary policy. For beginners the Fed does not focus on inflation or the biggest employment problem by simply manipulating the money supply (just because you give people more money does not mean they will consume it.) For example through expansionary policies the Fed Government securities were not purchased in accordance with the theory of quantity of money. Instead through the reverse repurchase agreements with commercial banks (which usually involve government bonds) the value of the federal reserve deposits involved in the bank is increased giving them more lending funds. At the same time banks were forced to lower interest rates to attract people to borrow money. The reduction in borrowing costs has led to an increase in household consumption and corporate investment which has created more demand pushed up inflation and lowered unemployment. Basecoin's white paper seems to assume that central bank policy relies solely on the theory of quantity of money but it is not.
The third is that we cannot fully affirm the long-term validity of the theory of quantity of money let alone in the short term. The European Central Bank’s Pedro Teres and Harald Ullich mentioned in their 2013 paper “Quantity theory is still valid” for countries with moderate inflation “currency growth and The original relationship between inflation is at least tiny or even non-existent.” When other factors such as output growth currency opportunity cost and yield are included it will indeed find improved adaptability but after 1990 it still notices The inflation rate of countries is quite similar and the growth rate of money is quite scattered. In the end although the theory of the quantity of money is still valid the author points out that “whether it should be used as a guide to long-term monetary policy is controversial” And “central banks in low-inflation countries need to focus on quite a few variables not just money supply so that they can control inflation.” Whatever the conclusion it is very complicated to maintain price stability as mentioned in the Basecoin white paper. relatively simple.
Fourth although decentralization is an ideal that is worth fighting for its application of monetary policy is wrong. Not many people are particularly keen on the idea of the central bank of economic and technical experts but without them (economic experts) the ability of the United States and other countries to cope with the financial and economic crisis will be greatly reduced. This is inevitable to some extent there will be problems that traditional wisdom and theory cannot fully cope with. For example how does the algorithm deal with the crisis and the economic recession ten years ago? The crisis tested the limits of what we know about monetary policy and forced policymakers to design untested and creative solutions. These policy makers such as Ben Bernanke are not algorithms but he has extensive experience in currency history and the Great Depression. If there is a crisis today policy makers will soon encounter problems with zero limits and even experts can't fully determine how to deal with them. Regardless of their shortcomings do we really believe in a group of economic and technical experts? They have been studying monetary policy throughout their lives rather than predetermined algorithms.
Over time monetary policy will not remain the same. In the course of the twentieth century we have seen the continuous evolution of the monetary system around the world in response to economic challenges theoretical perfection ideological changes social and political pressures. Monetary policy is an art as much as science and its history is constantly moving forward (and sometimes backwards). There is even no mention of a diversified monetary system at the same time.
Fifth Basecoin's exchange rate anchoring model is similar to the structure of the classic gold standard – limiting credit when the exchange rate is too low and expanding credit when the exchange rate is too high. Therefore Basis will encounter similar problems. An interesting gold standard parallelism is that Basecoin (Basis) relies on speculators and relies on them to quickly restore anchors even before the protocol needs to be initiated (and solves the short-term problems they believe in quantitative theory)
"If speculators see the price is too low and they believe it will eventually be corrected because the agreement will respond. They are motivated to use the current temporary price decline to buy tokens and they expect the agreement to take action."
Note the similarities in the description of the pre-war gold standard by Barry Eichengreen a currency expert at Berkeley University in California
“When the currency fluctuates the investor’s reaction tends to be stable. Assuming the exchange rate falls... Once the central bank takes measures to strengthen the exchange rate the funds will flow in from abroad in order to harvest profits in domestic assets and the capital will quickly Influx... the exchange rate self-adjustment strengthens minimizing the need for central bank intervention."
This practice worked well for some time because in general franchise and political power did not extend to a significant portion of the population. Monetary policymakers have not paid much attention to workers and unemployment because the most affected people have little voice in politics. However with the expansion of political rights and the development of unionization that began in the early twentieth century the seeds of the destruction of the gold standard were stitched. Investors lost confidence in the central bank's commitment to maintaining exchange rate stability. Therefore it did not provide the stability mentioned above (actually it was more destabilizing).
Eichengreen fully demonstrated how the broad expansion of democratic rights is incompatible with the classic gold standard operating method partly explaining that it collapsed shortly after the rebuilding of the two world wars. Assuming that Basecoin is trying to act as a currency in a region of the democratic political system it may encounter this challenge – a challenge that policymakers have never really solved but instead chose to establish a completely different currency order after World War II.
It is unrealistic to incorporate this factor into the algorithm. Tradeoffs such as exchange rate targets unemployment targets and price stability and credit expansion are not static parameters. As time goes by it is constantly changing due to social cultural political psychological and ideological factors.
We can base on the Taylor rule hypothesis algorithm
We did consider the unemployment rate which is reflected by the gap in output. However we consider the ratio of 1/3 to the unemployment rate and the ratio of 2/3 is the inflation rate. Of course there is a mathematical reason here which leads to a broader problem Do we really think that a society will always put price stability and unemployment rates in the same priorities? This is not a rhetorical question. the answer is negative. Many central bank policies are derived from the Taylor rule formula by r̃ terminology. The term refers to an autonomous decision made by human central bank policy makers who draw on experience rely on research pass historical insights and expert intuition. There is no algorithm that can achieve the autonomy of monetary policy.
