A Brief Analysis of FEI Stablecoin
The genesis launch of Fei Lab’s stablecoin protocol marks the biggest launch in DeFi history. The algorithmic stablecoin protocol raised 639,000 ETH, or $1.3 billion at the time of launching, and supplied liquidity to Uniswap’s biggest pool FEI-ETH with $2.6 billion liquidity. However, the moment the project launched, every investor got rekt. In this article, we analyze the problems with FEI, which are also common in other types of algorithmic stablecoins.
We assume that readers of this article have basic understanding of FEI’s mechanisms (if not, please purchase some discounted FEI at Uniswap to participate this grand financial experiment). The price of FEI, as proposed by their whitepaper, is designed to be stabilized through the participation of multiple parties in this ecosystem — genesis members, arbitrageurs, traders, general users, and essentially, the PCV.When the price moves beyond peg and stays for some time, PCV comes to the game by forcibly “re-weighting” the FEI-ETH Uniswap pool to re-peg FEI to $1. Such an idealistic design almost fails in reality. The dynamics of each category of participant are not at all what everybody could have imagined prior to the launch.
Genesis group
The genesis members of a project are usually early supporters and the most significant risk-bearers. It is expected that genesis members have long-term faith in an early project, align with the interests of a project’s long-term growth, and often, genesis group is limited in its size so that the risks, conflicts and disagreements can be restricted to a fairly small scale. This is nothing like FEI genesis event. FEI genesis was designed to be a ground-breaking event in the DeFi space, supported by top-tier investing institutions, a16z, Coinbase Ventures, etc., and more than 15,000 participants. No hardcap on the amount of ETH to be committed. More importantly, it happened during the epic bull-run of 2021. Rocket investors, solid stabilization mechanism, widespread discussions. Everyone was talking about FEI. Who don’t like it?
Most people come to FEI genesis for free money to grab. Even a shitcoin can pump 10x in a TG group with less than 100 members in such a bull market of 2021. FEI and TRIBE must pump harder under everybody’s attention in DeFi space. For people who did not pre-swap, the more ETH you commit, the more free TRIBE tokens you got. For those who pre-swapped, the motivation was largely incentivized by the “up-only” fantasy — the more money that PCV accumulates, the more valuable that TRIBE would become.
We are finally rekt by unrealistic expectations. Most assumptions are wrong. $1.3 bn of FEI got locked in PCV. More than half of such money, if not all, want a way out. There has to be a way to make it fair, hurtless, and bot-proof.
Arbitrageurs
In the original design of FEI, arbitrageurs should help to move the price back to $1 by buying with a reward below $1 and selling from the bonding curve to Uniswap pool above $1. At current stage and in the near future that we can expect, price will not rise above $1, not even if ETH value doubles (under the assumption that more than half of the committed genesis ETH came for free money without a long-term faith in the project, so they will exit in every possible means). Such large dumping pressure keeps normal arbitrageurs out of the scene. $1 is not a possibility.
The only type of arbitrageurs left in Fei are front-running bots. Buying Fei when rewards are 10%~20% and selling Fei the instant the reweighting happens. Subject to a burn penalty of less than 5% after the moment of reweighting, bots can easily make 5%~15% gain every reweighting cycle. Free money faucet for bots! The gains are taken from every seller who pays the burn penalty.
Users of Fei stablecoin
Any currency should have some utility. Buying some assets, paying for some services, taking out loans, or staking in a farming pool. Currency should also be liquid enough. You use it whenever you need it. You shouldn’t rely on external mechanisms (like the daily reweighting) to spend a currency. FEI, unfortunately, does not provide such utilities to users. Users are limited to (1) trading TRIBE with FEI (2) exchanging with ETH with heavy penalty almost at any time. Other than these, FEI cannot be utilized in any other place in DeFi. Users are restricted in the loophole of FEI-TRIBE-ETH trinity.
Governance
According to FEI Whitepaper, “The Fei Core team wants TRIBE to have a balanced distribution between Community, Team, and Investors while prioritizing the Community. We embedded both capital favoring and non-capital favoring distribution mechanisms, and emphasize equal opportunity through the Genesis Group.” The biggest allocation of TRIBE is 40% DAO Treasury, which amounts to 400,000,000 tokens. The amount is much larger than what the real community owns (by community I mean genesis participants and secondary-market TRIBE buyers, excluding insiders, private investors and admin key holders). The real community allocation is less than 40% (20% IDO + 10% Genesis + 10% staking rewards subject to a release schedule). After all, who is the DAO? At this stage, whoever controls the DAO controls the destiny of FEI protocol.
The voting rights behind the 400 million DAO-controlled TRIBE tokens is yet unclear to the community. Retail investors holding TRIBE do not see any opportunity to influence the protocol decisions. They invest with real money (ETH as the most valuable, universal, decentralized currency in DeFi) in exchange for valueless TRIBE. The governance forum https://tribe.fei.money/ has nothing to do with TRIBE token, but the governance decisions are purely selected by arguing and team’s own opinions. The inability to govern the protocol devalue the utilities of TRIBE, making it a pure speculative asset only to be dumped by genesis participants and institutional investors who basically got free money from the project. TRIBE governance is almost missing from the protocol.
Inherently, the problems of FEI can be summarized to the following points.
· Excessive supply — $1.3 bn of supply but the real demand is much less
· No exit liquidity — To move FEI out of FEI-TRIBE-ETH loophole into the larger DeFi world, a heavy penalty is enforced
· Insufficient arbitrage opportunities — only front-running bots with large capital can make a profit
· Limited use cases — with FEI people cannot do most of the things that they use DAI or USDC on.
· Lack of faith in the community — A majority of FEI holders came to the genesis event only in search for free money without an interest in the project’s long-term growth
· Missing proper governance — The governance process is not transparent and lacks on-chain governance methods. Community’s voice is not heard.
Such problems are not unique to FEI. Well-known algo-stablecoins such as Basis Cash, Empty Set Dollar, Ampleforth also share some of these problems. Without a centralized party external to DeFi who is responsible for exchanging one stablecoin for 1 USD, algo-stablecoin must figure out other ways that is internal to DeFi to balance the supply with demand, maintain liquidity, promote utility, build up faith, construct a strong community.
