Fei Protocol - New Stabilization Mechanism

I was reading through the Fei Protocol whitepaper. It’s a new stablecoin protocol, financially backed by a16z and Coinbase.

The authors claim that Fei is able to use “dynamic mint rewards and burn penalties on DEX trade volume to maintain the peg”. If I understand correctly, the protocol retains added value from purchases above the peg and uses this to bring the peg back up when it dips below. I think this will allow Fei to maintain its peg without needing as much collateral to back it.

Please correct me if I’m wrong on any of this. I just wanted to bring attention to this new mechanism and check to see if Maker would be able to add a similar “direct incentive” mechanism.

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It’s another protocol that doesn’t understand what fractional reserve banking means.

Contrary to Maker that uses DAI-denominated loans as DAI collateral, they will have ETH. This can be a good thing obviously if ETH price increases. But it can lead to a bank run and the end of the project if ETH price decreases.

Celo was lucky, there now have $120M of crypto-assets (excluding CELO) to back $42M of stablecoin. Obviously, the cUSD owners did carry the risk and were not compensated for that.

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So I read over this as well. Here are some of my thoughts (possibly I’m misunderstanding some stuff, but not sure.)

  1. The dynamic burn (mint too) penalties are only applied to specific trading venues. So far as I can tell, that will just cause people to find new venues to avoid burn and will lead to apparent price dislocations across trading venues because the ‘visible’ rate doesn’t take into account the burn.

  2. Users providing liquidity in incentivised pools directly benefit from reweight operations by the protocol. This directly sucks value out of the protocol and towards LPs. The weight of this grows as there are more external LPs, and I see no reason why the ratio of external LPs to protocol LP wouldn’t increase given this.

  3. ETH dropping in price puts pressure on the reweight mechanism, potentially leading to the scenario @SebVentures describes.

I’m not sure these are critical issues though, and I’m excited to see if it works.

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The fei protocol seems promising and I believe it will work. RAI also seems to be working and it offers 2% loans with ETH as collateral, but its supply grows slow (49M currently).

I think all 3 projects will be relevant and the project which is most decentralized, secure, profitable and cheap to use (L2!) will win in the long run.

Not one for schadenfreude (well, okay, maybe a little!) but it’s impressive how they’ve managed to piss off pretty much everyone who bought in.

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Incentives matter. With DAI’s success, it’s easy to forget how hard it is to succeed at both tech and economics at the same time. Both are always more complicated than people think, and there’s not a ton of folks who have deep domain knowledge in both.

A visualization of the dynamic burn penalties.

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An absolute disaster unfolding with FEI. A good reminder of just how hard it is to have decentralized stablecoins.

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