Fei Stablecoin’s ‘Protocol Controlled Value’ Penalizes Those Wanting Their ETH Back
The project’s genesis was a success with 639,000 ETH committed and $1.3 billion FEI minted. But with little demand for FEI right now, people are running for the exit, which has consequences.
Fei Labs, the firm behind the new stablecoin project Fei Protocol, raised 639,000 ETH for its token generation event and minted $1.3 billion FEI.
The firm shared over the weekend that more than 17,000 unique addresses participated in the event, which can now redeem FEI and the project’s proposed governance token TRIBE, based on the ETH committed.
The event led the FEI-ETH pair to become the largest pool Uniswap on Saturday, and the pre-swap of $385 million FEI for TRIBE was probably the largest ever AMM swap, said the Fei Labs.
Liquidity on the largest DEX, Uniswap, also went past $8 billion on April 4th, up from $5.35 billion at the beginning of the month, thanks to this.
Demand for stablecoins continues to rise, and in the DeFi ecosystem, they have become a staple. But the most popular ones, fiat-collateralized USDT and USDC, have a critical flaw of being centrally controlled while crypto-collateralized DAI has scalability issues, said the team in its introduction of the project earlier this year.
As such, the stablecoin FEI uses a “Protocol Controlled Value” to maintain its $1 peg. Currently, it is at $0.948, as per CoinGecko. The governance token is meanwhile trading at $2, down from the opening price of $3.18.
In the experimental stability mechanisms to maintain its peg, Fei uses direct incentives, which are seen as a fairer and more capital efficient and decentralized approach to managing the stablecoin.
Here, both trading activity and usage of the stablecoin are incentivized where rewards and penalties drive the price towards the peg. The team says,
“FEI's stability mechanisms are geared towards long-term holding. TRIBE governance is responsible for the peg and can adjust the incentives above as needed.”
The community, however, isn’t really confident of the project’s choice of innovation with the mechanism. Jon Wu noted,
“You thought you were buying a dollar for 50 cents, but instead, you paid $1.01 only to get $0.95, and now if you try to sell it, you'll end up with $0.60.”
Messari’s Ryan Watkins said,
“The issue with FEI right now is most people want to sell it back for ETH, but doing so incurs extreme penalties. Eventually, Fei will re-weight to bring FEI back to its peg, but then what? There’s little real demand for FEI, and most are still running for the exits.”