Fei Protocol (FEI)

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Algorithmic stablecoin

Basics

History

  • Fei Labs is proposing the dissolvement of Tribe DAO following months of silence by its founders and an earlier hack in its sister protocol Rari (20-8-2022). It created quite some aggravation with one of its founding partners Frax. From a summarization thread of the situation (20-8-2022):

"In early 2021 Fei Labs raised $1.3B USD in #ETH to build a decentralized stablecoin. That ETH raised was used as collateral for it's stablecoin $FEI. In December 2021, Fei Protocol merged with Rari Capital making it the largest DAO-on-DAO mergers ever. Fei and Rari’s joint effort got off the ground with $2 billion in liquidity. But the tragedy struck on April 2022. Fuse pools were hacked for $80M USD. After the hack, $TRIBE holders voted AGAINST using PCV for the hack victim payment. In June the CEO of Rari Capital announced that he would resign. In total $117M of #ETH is affected by the closure."

"The inspiration for the vision of Fei Protocol comes from an ancient stone currency — Rai, or Fei, of the Micronesian island of Yap. We hope that the FEI stablecoin exhibits the same stability, simplicity, and ubiquity as its stone counterpart."

Audits & Exploits

  • From LlamaRisk (11-1-2022):

"The audits do not reveal any particularly damning details. OpenZeppelin and Consensys point to oracle issues that do not seem to be fully fixed."

"Fei awards $800k bounty for bonding curve price manipulation vulnerability."

"The team is conducting an audit so it can reinstate price stabilization mechanisms that were halted due to a vulnerability."

Bugs/Exploits

"During the much hyped Token Genesis Event, users were able to mint FEI from the ETH bonding curve for up to a 50% discount. The terms and conditions of the discount meant that participants would only get this discount if under $250m in ETH was contributed. As $1.3B in ETH was collected at launch, this discount was taken away, and the ETH was irreversibly given to the project for their “Protocol Controlled Value” model. The entirety of this PCV was initially used to build liquidity on Uniswap. At one point, the Uniswap FEI/ETH pool had over $2.6B in liquidity, created from the ETH raised during the initial sale. The initial peg was lost mainly due to the “pre-swap” option allowing participants to automatically swap their FEI tokens for TRIBE upon launch, which created millions of dollars of selling pressure."

"The Fei team disclosed that it had been alerted to a vulnerability through its bug bounty program. After identifying the bug, the team decided to "suspend mint rewards" on the protocol. These are the incentives for anyone buying Fei, designed to help it return its value toward parity with the dollar. As a result, this led to the token’s price falling even further. "Due to a bug, the team disabled the "buy" incentives, leaving only "sell" disincentives. So the FEI/ETH pool is looking very scary," tweeted Robert Leshner"

Governance

Admin Keys

  • From LlamaRisk (11-1-2022):

"Currently, the Fei Protocol guardian multi-sig is under the core team’s control (3/7 multisig, all doxxed), intending to transition it to community-held multisig."

DAO

"Fei Protocol will launch with a fully decentralized DAO on day one. The TRIBE token controls the DAO. TRIBE holders can vote on the following actions among others:

  1. Adding new bonding curves in new tokens or adjusting price functions of existing curve(s)
  2. Adjusting the allocation of PCV for new incoming funding or existing PCV

The Fei Protocol DAO will be both powerful and governance-minimized. FEI stability does not require any active intervention by governance."

Treasury

  • 40% of the token distribution goes towards the DAO treasury (10-2-2021).
  • Voted for a token swap with Balancer (11-2021):

"200,000 BAL from the Ecosystem Fund would be exchanged for the equivalent USD value of TRIBE and FEI in equal proportions from Fei DAO Treasury."

Token

Launch

"To mitigate frontrunning and unequal early distributions, Fei Protocol will include a “Genesis Period.” The Genesis Period will be a time period of 2–3 days in which early adopters can pool their ETH. This group will be known as the Genesis Group. Members of the Genesis Group earn a shared pro-rata percentage of the first bonding curve transaction. This is similar to the Hegic IBCO. Using this approach, access to the earliest FEI on the bonding curve will be open to all with equal opportunity. As an additional reward, the Genesis Group earns 10% of the total TRIBE supply pro-rata.

The Genesis Group completion will kick off an Initial DeFi Offering of the TRIBE token. The listing will be on Uniswap, denominated in FEI and TRIBE." 

"During the much hyped Token Genesis Event, users were able to mint FEI from the ETH bonding curve for up to a 50% discount. This also made them eligible for an airdrop of the protocol governance token TRIBE, which seemed to represent an appealing opportunity for many, as over 17,000 unique addresses participated in the event."

"The coin traded below parity with the US dollar since its $1.2 billion launch [and] a bug has emerged that’s resulted in some users struggling to sell their coins. As the incentive mechanism has failed, the coin’s price has continued to plunge, making it prohibitively more expensive to sell."

Token allocation

"The FEI stablecoin has an uncapped supply that tracks demand. FEI enters circulation via sale along a bonding curve. This curve approaches and fixes at the $1 peg. When new demand for FEI arises, users can acquire it by buying on the bonding curve. The price function will start low to reward early adopters for purchasing FEI. Fei Protocol will support the creation of bonding curves denominated in any ERC20. The launch will contain only a single curve denominated in ETH.

The protocol allocates a portion of the TRIBE token to a FEI staking pool. Users can deposit FEI and receive a pro-rata percentage of the TRIBE drip into the pool. The development team and investors retain another portion. A percentage will be split between the Genesis Group and Initial DeFi Offering. The remaining TRIBE stays in a treasury controlled by governance."

  • From their blog (10-2-2021):

"The total initial supply of TRIBE is 1 billion. We have this token distribution broken down as follows, with Team and Investors rounded to the nearest percent:

  • 40% DAO Treasury
  • 20% Initial DEX Offering (IDO)
  • 13% FEI Core Team
  • 10% Genesis Group
  • 10% Staking Rewards
  • 5% Investors
  • 2% Grants"

Utility

Stablecoin

  • FEI is the stablecoin of the protocol.
  • The stablecoin is now (4-5-2021) trading at $0.97 after previously falling to $0.70.

Technology

How it works

  • From a summarization thread (20-8-2022):

"In early 2021 Fei Labs raised $1.3B USD in #ETH to build a decentralized stablecoin. That ETH raised was used as collateral for it's stablecoin $FEI. Fei is collateralized by various crypto assets, but in contrast to DAI, those assets are 'owned' by the protocol. Users 'sell' crypto to get FEI. The 'sold' asset is included in the Protocol controlled value (PCV). Owning the 'collateral' means that the PCV can be deployed into a various strategies to:

• defend the peg • yield farm • create utility for FEI.

In other words, $FEI is like a yield farming hedge fund. FEI peg backing mechanism is quite simple:

• If FEI below 1$: Buy FEI in the market with Treasury assets and redeem at $1 price on Fei Protocol. • If FEI above $1: Mint FEI on Fei Protocol at $1 and sell it in the market."

"the tl;dr is that it uses different automated mechanisms and logic in order to maintain its peg to 1 US dollar. Though the key difference between Fei and some of the other algorithmic stablecoins is that it doesn’t seem to rely on extreme speculation order to achieve stability - it instead uses a novel bonding curve mechanism."

"Fei Protocol achieves this goal by incentivizing Uniswap trading volume with mints and burns. These incentives apply directly to the trader’s balance, in proportion to the distance from the peg. The protocol incentivizes traders via mint to return the price back up to the peg. The formulas used ensure that all volatility below the peg is net deflationary. This will help bring the supply down to the right level relative to the current demand. The incentives only apply to trades when the spot price is below the peg. The side above the peg is taken care of by the arbitrage loop with the bonding curve."

"FEI works on a straightforward transactional basis. “Users can buy FEI from the protocol, and the protocol takes those assets in reserve, which we call protocol controlled value,” Santoro explained. In other words, users don’t stake ETH, Ethereum’s native currency; they buy FEI. The asset traded belongs to the Fei protocol after the trade.

“That’s sort of where the magic of FEI is. The assets in reserve could be under-collateralized, they can be over-collateralized,” Santoro explained. Further, the assets would be deployed elsewhere, such as on the secondary market or – later – in yield-generating projects.

“If you want to get more FEI, you just buy it for a dollar [worth of something] from the protocol,” he said. There’s no debt that has to be maintained by users, as there is on MakerDAO, which generates the stablecoin DAI. The protocol would simply mint FEI as needed. You can’t directly redeem ETH from the protocol. You have to go to a secondary market,” Santoro said, but the Fei protocol will be placing the ETH it takes there anyway."

"In plain English, the direct incentives mechanism kicks in when Fei is above or below peg - if it’s below, then a burn mechanism kicks in which gets exponentially worse the further the price of Fei is from its peg. For example, if you want to sell Fei at its current price of $0.96 then you will be taking a ~30% haircut on that sale due to the burn mechanism."

Upgrades

  • After the failed launch and subsequent bug, the team announced it would take away the penalty for selling below the peg. Some wondered how this was done without a government vote with the governance token TRIBE.
  • From Crypto Briefing (4-5-2021):

"The governance community has voted to allocate 300,000 ETH to users, and it will also double staking rewards."

Staking

"The protocol allocates a portion of the TRIBE token to a FEI staking pool. Users can deposit FEI and receive a pro-rata percentage of the TRIBE drip into the pool."

Protocol Controlled Value (PCV)

"Users cannot sell FEI on the bonding curve. Instead, the protocol retains the incoming ETH as Protocol Controlled Value (PCV). Fei Protocol deploys the PCV to create a liquid secondary market where users can sell FEI back into ETH. This is a stronger use case than the IOU common to most TVL applications, as the PCV is permanent. It will initially allocate 100% of the PCV funded by the ETH bonding curve to a Uniswap pool denominated in ETH/FEI. Governance can reallocate PCV to other platforms in the future if the use case is clear."

Compliance

"On Friday, Crypto Twitter shared screenshots of a legal notice posted on Fei's Discord server that was issued by the Superior Court of San Francisco. The notice, referencing a legal NFT airdropped into the wallets of investors, informed users that they can apply to get a slice out of a multimillion-dollar preliminary settlement reached in the case.

In a class-action complaint filed on April 1, 2022 in a San Francisco court, Fei and four of its developers were accused of selling unregistered securities via these tokens.

Ultimately, the two sides agreed to a preliminary settlement in May 2023 that meant Fei Labs was not required to admit to any wrongdoing. A nearly $18 million dollar fund was created to cover both notices and fees incurred during the litigation, with all claimants having until October 1 to submit a notice for compensation.

A final settlement hearing is also scheduled to take place on October 27 to consider whether to approve the settlement."

Their Other Projects

Liquidty as a Service (Laa$)

"Fei has partnered with Ondo to launch Liquidity as a Service (Laa$). Laa$ allows protocols to create liquidity in a manner that is significantly less expensive than traditional liquidity mining. The initial launch group has generated $100M TVL across Uniswap pools for Gro, Synapse, UMA, Kylin, Near, PoolTogether, Shapeshift, and mStable."

Roadmap

  • Can be found [Insert link here].

"The mission of Fei Protocol is to create an entirely decentralized stablecoin. Therefore it is critical that no tokens issued by trusted third-parties (e.g. USDC, USDT, wBTC) be used as collateral on the bonding curve. This is a stance the development team hopes will be shared by the governance community post-launch."

Competition

Pros and Cons

Pros

Cons

"One risk of Fei is a negative spiral brought on by a sharp drop in the price of its collateral. This is an unavoidable risk since it is trying to defend a fixed $1 peg backed by volatile collateral. Should the price drop in its collateral be large enough, the long-term ability of the system to hold its peg may be questioned and a “bank-run” could be initiated.

In this scenario, as we have seen with non-backed stablecoins, the speculators supporting the price would disappear very fast (meaning direct incentives would not be enough to hold peg). Further, the system would need to protect the peg through its “peg reweights”. However, due to impermanent loss and the fact that reweights are essentially using collateral to support the price on the open market, a negative feedback loop may ensue. Collateral sold to support the price means there is less collateral to support the price later, creating a lack of confidence that weakens the price and causes more collateral to be sold. This situation could continue until a full-death spiral is achieved.

One of the backstops to this death-spiral which Fei mention is that TRIBE (the governance token of the system) could be used to re-collateralise the system. However, this is something that would need to be an emergency vote-type- decision to work. Should it ever need to be used, the question would be whether the protocol could recover for fear of the situation arising again.

Regardless of this, a positive aspect of Fei is that it is more capital efficient than over-collateralised stablecoins and invariably more robust than the 1st generation of purely algorithmic stablecoins."

Team, Funding, Partnerships, etc.

Team

  • Full team can be found [here].
  • Joey Santoro; CEO of Feil Labs and writer of the whitepaper

Funding

"Raised $19 million from Andreessen Horowitz (a16z), Framework Ventures, Coinbase Ventures and AngelList founder Naval Ravikant, among others. ParaFi Capital and Variant Fund also participated in the round."

Partners

"Ondo Finance and Fei Protocol have partnered with several cutting-edge DeFi protocols to help them increase their decentralized exchange liquidity."

  • Might merge with Rari (17-11-2021). Votes got passed, FeiRari is a fact (22-12-2021).
  • Balancer DAO commits to DAO Agreement with Fei DAO (11-2021).
  • Partnering with Gelato has led to significant increases of concentrated liquidity and volume on Uniswap V3 (12-2021).

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