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The price volatility of Bitcoin and other cryptocurrencies is one of the biggest barriers to widespread adoption that cryptocurrencies face today. Unlike fiat currencies, today’s cryptocurrencies do not have a central bank that implements monetary policy to keep purchasing power stable, meaning that changes in demand can induce massive fluctuations in price. If users cannot be sure that the purchasing power of their accounts will remain stable, they will never adopt a cryptocurrency as a medium of exchange over a price-stable alternative. Moreover, without price stability, it is difficult for credit and debt markets to form on top of a cryptocurrency because every contract taking payments in the future must charge a large premium to factor in price risk. For example, imagine you received a salary of 1 BTC per month—if the price of BTC dropped, you might miss rent.
While much cryptocurrency research has been dedicated to technical topics such as transaction throughput and smart contracts, almost no attention in comparison has been paid to improving price stability, a problem we believe to be a much bigger obstacle to the mass adoption of cryptocurrencies as a medium of exchange. In this paper, we introduce Basis, a cryptocurrency whose tokens can be robustly pegged to arbitrary assets or baskets of goods while remaining completely decentralized. For example, to start off, 1 Basis can be pegged to always trade for 1 USD. In the future, Basis could potentially even eclipse the dollar and be updated to peg to a consumer price index (CPI) or basket of goods, similar to how central banks hit inflation targets today. The Basis protocol accomplishes this by algorithmically adjusting the supply of Basis tokens in response to changes in, for example, the Basis-USD exchange rate. This implements a monetary policy similar to that executed by central banks around the world, except it operates as a decentralized, protocol-enforced algorithm, without the need for direct human judgment. For this reason, Basis can be understood as implementing an algorithmic central bank.