What it means
A stablecoin is a cryptocurrency designed to hold a fixed value, usually one US dollar. Most do this by holding real assets in reserve, but Basecoin proposed to do it algorithmically, with no dollars in a bank account backing the coins.
The mechanism had three parts. If the coin traded above a dollar, the protocol would create new coins and hand them out, increasing supply to push the price down, and if it traded below a dollar, it would sell bond tokens in exchange for coins, taking coins out of circulation to push the price up.
A third class of token, the share tokens, received newly created coins when the system was expanding, which is how early backers expected to be rewarded. That design is often called a seigniorage model, after the profit a government makes from issuing currency.
The project never launched. Its founders concluded that the bond and share tokens would be treated as securities under US law, which would have imposed transfer restrictions incompatible with an open trading system, so the team shut the project down and returned the majority of the capital it had raised.
The wider significance is the design question it left behind. Supply-based stabilisation depends on someone being willing to buy bond tokens during a fall, which is exactly when confidence is lowest, and later algorithmic stablecoins that followed similar logic have suffered the same weakness.
In practice
Real-world examples.
Example
A fintech treasury team reviews stablecoins for holding working capital. It rules out algorithmic designs of the Basecoin type on the grounds that the stability depends on continuing demand rather than on assets it could claim, and keeps its balances in fully reserved instruments instead.
Example
A venture investor uses the Basecoin wind-down as a reference point when assessing token structures. Because the bond and share tokens were the regulatory problem, the investor now asks every founder which of their tokens would be treated as a security before discussing valuation.
Example
A university finance course uses the design to teach monetary policy. Students model the supply expansion and contraction rules and discover that the contraction step fails whenever bond buyers expect the peg to break, which mirrors a classic currency crisis.
Formula
Calculation
Supply change = circulating supply multiplied by the percentage gap between the market price and the one dollar target.
Suppose 200,000,000 coins are in circulation and the market price rises to $1.10, which is 10% above the one dollar target. The protocol would create 200,000,000 x 10% = 20,000,000 new coins and distribute them to share token holders, lifting supply to 220,000,000 in the expectation that the extra supply pushes the price back towards $1.00.
Now take the opposite case. With 200,000,000 coins in circulation and a market price of $0.90, the gap is 10% below target, so the protocol would seek to remove 20,000,000 coins by selling bond tokens. If each bond token is sold for $0.90 and promises one coin later, buyers must part with 20,000,000 x $0.90 = $18,000,000 of coins today in return for a claim worth $20,000,000 only if the peg is successfully restored.Case study
Seen in the real world.
Meridian Pay is an illustrative, fictional payments startup that wanted to settle cross-border invoices in a dollar-stable token to avoid daily currency swings. Its engineering team favoured an algorithmic design modelled on the Basecoin rules because it needed no banking relationships.
In this fictional assessment, the finance lead stress-tests the model rather than the code. She asks what happens to a $500,000 settlement balance if the token trades at $0.85 for a fortnight, and finds that the company would be relying on strangers to buy bond tokens during a panic in order to be made whole.
The illustrative decision is to split the problem. Meridian uses a fully reserved stablecoin for customer balances, keeps its own small research allocation in the algorithmic design, and writes a policy that customer funds are never held in an instrument whose stability depends on new buyers appearing.
Watch out
Common mistakes.
- Describing Basecoin as a failed stablecoin that collapsed in the market, when it was wound down before launch for regulatory reasons.
- Treating all stablecoins as equivalent, when a fully reserved coin and an algorithmic coin carry completely different risks.
- Assuming a dollar target in the design means a dollar is held somewhere, which was never the case here.
Questions
People also ask.
Why did the project return investor money?
Its founders judged that the bond and share tokens would be regulated as securities, which would have blocked the open trading the mechanism needed.
What is the core weakness of a supply-based peg?
Restoring the peg after a fall requires new buyers precisely when confidence has gone, so the mechanism is weakest exactly when it is needed.
Does any of this matter to a business that will never hold crypto?
Only as a lesson in asking what actually stands behind a promise of stability, which applies equally to supplier guarantees and credit insurance.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related