EP50: FEI-lure of FEI Protocol
EP50: FEI-lure of FEI Protocol
FEI Protocol.
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Introduction
Parallel to the development of Defi platforms is the development of stablecoin platforms. Fei Protocol believes that there are many stablecoins in the market right now. But each type will have different disadvantages.
For example, USDT, USDC are controlled by centralized authority, stablecoins backed by tokens like DAI have scalability problems. Stablecoins like ESD are centralized in the rewards provided by the platform. These factors create an unequal distribution of stablecoin growth.
Because of this, Fei Protocol has launched FEI, a stablecoin with USD equivalent value, decentralized, liquid and scalable, making Defi platforms freely accessible to everyone. due and safest.
FEI Summary
There are two tokens in the FEI Protocol:
$FEI is an algo stablecoin. It changes the supply and does a lot of other things to maintain that one dollar mark.
$TRIBE is the governance token which can be used for voting on different kind of things.
How is it special?
The protocol sold $ETH for $FEI. FEI is not like Maker where you are depositing $ETH to borrow out $DAI. You are selling $ETH to get $FEI out, instead of borrowing $FEI against $ETH as collateral. To get $FEI back, it is not repaying a collateral fee, but to sell $FEI on Uniswap for $ETH. This is a trade, so your $ETH is no longer yours once you sell it.
The liquidity pool on Uniswap is what is special. It is partially owned by the protocol. They call it the PCV or the Protocol Controlled value.
There are direct incentives and punishments to the users through taxation and subsidising. It is so big because they raised 1.3 billion dollars in ETH. The first billion was raised in 24 hours.
Token Design (FI): Direct Incentives
What are Direct Incentives?
$FEI does not have this particular penalty anymore but here is a screenshot showing a penalty.
You have direct incentives where you can buy and sell $FEI at whatever value. The USD value is, let's say 95 cents, but there is a penalty added if you remove some tokens because you are punished by an additional tax.
According to the image above, when you take 1 $FEI out, which is valued at 95 cents, you will lose an additional 0.23 as a penalty and you are effectively only getting back about 77 cents. The idea is good because it does not make any rational sense for you to remove your $FEI when prices are low since you have to pay additional taxes.
But people do not always act rationally, which is what happened with $$FEI. When prices fell people started to get worried and uncertain about everything. They started doubting the ecosystem and wanted to get their money out and as a result, more and more people were trying to sell their $FEI. This suppressed the prices. The penalty got larger and larger and things went a bit south.
How was the penalty calculated?
Taking the screenshot as an example, the difference between one dollar and the USD value of 95 cents is $0.05. The penalty is a square of the difference so the square of $0.05 is $0.25. The penalty is about 23 to 28 cents so around 25 cents. If you go with that concept the biggest difference or penalty that you can get is one dollar or 100 cents because the square of 10 cents difference is 100 cents which means if $FEI drops below 90 cents then you have to pay to liquidate $FEI.
Incentive Side
The incentive side is that when $FEI is less than one dollar, and you mint more $FEI by putting $ETH in, you get bonus $FEI.
What Else Did You Miss?
Economics Fundamentals
Three Areas where $FEI went wrong
1. Mechanism Design
Free money by arbitrage
Free $TRIBE
Direct incentives
2. Secondary and Tertiary effects
$TRIBE supply (risk-free)
Willingness to sell $FEI (liquidation)
Willingness to buy $FEI
3. Communities and VCs
Economics Lessons
1. Game Theory
2. Secondary Effects
3. Dynamic Engineering
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TLDR:
Fei has different mechanisms in place for above and below the peg. Most new supply comes in on a bonding curve denominated in ETH that fixes slightly above the peg. This is a price ceiling for FEI, any secondary market price above this can be arbed down.
Below the peg, the normal mechanism is "dynamic incentives". This means when traders sell there is a burn on their FEI balance (only the trader selling). When they buy there is a mint which is lower than the burn that led to that point. Dynamic incentive uses dynamic mint rewards and burns penalties on DEX trade volume to maintain the peg. At least one incentivized DEX acts as a hub. Rest of the exchanges/secondary markets can arbitrage with the hub. This helps maintain the peg throughout the ecosystem.
The Fei protocol, also has governance token, TRIBE. TRIBE comes both from a liquid DEX offering and from liquidity incentives for supplying FEI/TRIBE liquidity.
Ps: Order the textbook "Economics and Math of Token Engineering and DeFi" today!