A one-year-old Hoboken, New Jersey-based cryptocurrency startup called Basis received $133 million in venture capital on Wednesday — along with some criticism.

The round was led by Bain Capital Ventures and included other notable investors such as Andreessen Horowitz, Lightspeed Venture Partners, Alphabet Inc’s GV, Foundation Capital, Wing, Zhenfund, Valor Capital, billionaire Stanley Druckenmiller and Federal Reserve chair runner-up Kevin Warsh.

The company, formerly known as Basecoin, began developing a cryptocurrency in 2017 that would not suffer price volatility. The world’s most traded digital currency, bitcoin, has seen such swings in market value that a single coin went from $900 in January 2017 to near $20,000 by the end of the year, then fell to near $8,000 in the following months.

Although Bitcoin’s example is most prominent, volatility is common for many cryptocurrencies such as Ethereum and Litecoin. That sort of instability, argued Salil Deshpande, a Bain managing director, is what stands in the way of cryptocurrency adoption in traditional business.

“Cryptocurrencies lack an important feature of currencies: price stability,” Deshpande said. “Without price-stability it is impossible to use the cryptocurrency in transactions. Non-price-stable cryptocurrencies such as Bitcoin are cryptoassets or cryptocommodities, not cryptocurrencies, just as gold is an asset or commodity, not a currency.”

The protocol that Basis runs its coin on would accomplish stability in a manner similar to what the company says is how central banks combat inflation: by changing the money supply.

“Put simply, when a central bank needs to expand the money supply, it runs the proverbial printing press to put new money into circulation,” said Nader Al-Naji, chief executive and co-founder of Basis. “When the supply of Basis needs to expand, newly-created Basis is distributed to people who participate in the system. In that way, the system decentralizes monetary expansion.”

According to the Basis white paper, the protocol would use a system that would gather pricing data from trusted cryptocurrency exchanges and then algorithmically expand or contract currency supply to fit demand.

“Long-term, a stablecoin (a cryptocurrency that’s price-stable relative to fiat, or a basket of fiats) could bring unprecedented levels of accountability to the economies of developing nations,” Deshpande said, citing one of the potential markets for such a currency. “It could be used as a global store of value and mainstream medium of exchange, initially in developing countries with unreliable central banks, and eventually globally.”

Basis and its cryptocurrency is not the first time a “stable” digital currency has been attempted. For example, BitShares began developing a technology to “peg” or tie value of its currency to another asset such as the U.S. dollar or gold. Tether is another cryptocurrency claimed to be one-to-one backed by traditional currency held in a vast reserve, so one USD Tether is always $1.

Although Basis has attracted a lot of venture capital attention, its system is not without critics, such as Preston Byrne, co-founder of the blockchain platform Monax and structured finance lawyer.

Byrne argued in an in-depth analysis of the protocol that although central banks come up often in the Basis white paper and investor quotes, what the Basis protocol does to expand and contract supply is not how central banks work. Furthermore, he said, the entire structure of the protocol may be built on wishful thinking.

“Due to the Basecoin team’s failure to ascertain the difference between the Treasury Department and the Federal Reserve System, the structure their ‘white paper’ puts forward… is recursive, or the financial equivalent of a perpetual motion machine,” Byrne wrote.

According to Byrne, the system would depend too heavily on new money coming in during periods of volatility to allow it to shift towards the “pegged” price. As a result, with too few traders or buyers of the currency would lead to a collapse.

Byrne has been writing about how “stable coins” do not work for some time now, with an entire series (part 1, part 2, part 3) dedicated to the scalability and economic sustainability of the proposals.

Meantime, some large Silicon Valley backers of cryptocurrencies recently met with officials from the Securities and Exchange Commission to request an exemption from federal oversight, according to the Wall Street Journal. Among those backers was Andreessen Horowitz.

Image: Basis