Originally called Basecoin, Basis had secured $133 million in funding to build an algorithmic stablecoin. Its founder, Nader Al-Naji, frequently described the project using code to maintain price stability for its token in the same way the U.S. Federal Reserve does for the dollar.
The firm, which raised $133 million in funding, ran into regulatory headwinds as it attempted to get its algorithmic stablecoin off the ground, said multiple people with direct knowledge of the situation. As a result, Basis is shutting down operations and returning the majority of capital raised to investors. Backers include Bain Capital Ventures, GV, Andreessen Horowitz, Lightspeed Ventures and a number of other firms.
Salil Deshpande, an investor at Bain Capital Ventures who was at the forefront of the investment round in Basis, discussed Basis’ closure on the latest episode of Balancing The Ledger, Fortune’s show on the intersection of tech and finance.
Deshpande said Basis tried to make changes to its intended product that would make it comply with U.S. securities law—the cause of its undoing—but the company ultimately found this wasn’t worth the effort.
“The team explored a whole bunch of alternatives for what to do about this,” Deshpande said. In the end, Basis’ leadership chose to abandon the idea rather than compromise its original vision.
“To make an analogy, if you’re playing tennis and you decide, instead of tennis rackets, you want to start using tiny, little paddles, and instead of a tennis ball you want to start using a small plastic ball, and then you want to play on a table instead of a tennis court, at some point along that way it stops being tennis and starts becoming ping pong,” Deshpande told Fortune’s Robert Hackett and Jeff John Roberts.
In Deshpande’s illumination of the situation, each modification to Basis’ system made it look more and more like other stablecoins already on the market, such as Tether, Maker Dao’s Dai, the Winklevoss twins’ Gemini Dollar, and Circle’s USD Coin.
“It didn’t seem like a big contribution to the world if we did that,” Deshpande said.
The Basis token was different from other stablecoins in its design: it is stabilized through on-chain supply management.
When the price of Basis is not at equilibrium, the smart contract increases or decreases supply to bring the price back to $1. The contract decreases the supply through by burning coins if the price of Basis is too low. On the contrary, it increases supply if the price of Basis is too high.
“There was some hope and some assumption that the regulatory environment would be a little more favorable to the bond tokens and share tokens than it actually was,” Deshpande said.
Many cryptocurrency experts were doubtful of the project from the start, claiming that the fundamental economics were bound to result in a death spiral. But Deshpande supported the founders’ concept, even amid its death rattle.
“You could argue that if something is complicated enough and ambitious enough, then it’s silly,” Deshpande said. “A lot of venture investments are silly or seem silly.”
“All of the investments I’ve made that have worked have had those characteristics,” said Deshpande, whose biggest investment successes include the software company Mulesoft and and peer-to-peer loan issuer LendingClub.
