Consultant with Bankless Consulting and Tokenomics DAO. Writer and Researcher for Web 3. Crypto Class of 2016
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Consultant with Bankless Consulting and Tokenomics DAO. Writer and Researcher for Web 3. Crypto Class of 2016
Fei Protocol Research Report
By: Joe King 3/22/22
THESE STATEMENTS SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.
Project Overview
FEI is a decentralized scalable and Defi-Native stablecoin protocol built on the Ethereum block chain. FEI is a 1 to 1 stable coin pegged to the US dollar providing redeemability for FEI using “protocol controlled value” (PCV). The aim of FEI token is to propose a balance between the models of overcollateralized decentralized stable coins (DAI) and centralized custodial stable coins (USDC, Tether). FEI uses the value it controls to maintain secondary markets and earn yield for the protocol through a variety of decentralized mechanisms.
FEI has two tokens associated with the protocol: FEI (stable coin) and TRIBE (governance token). The TRIBE DAO (Decentralized Autonomous Organization) is a partial moderator for FEI protocol and governance for FEI is being migrated over to the DAO over time with the final goal of becoming fully decentralized.
The Fei token is a fully decentralized stablecoin and is designed to allow upgrades and incentive mechanisms for the intent to maintain the $1 Peg. FEI is collateralized by a PCV reserve. Market CAP is under 500M (426 at the time of writing), with 3905 holders of the token.
TRIBE token is a governance token that manages the protocol, max supply capped at 1 Billion. 13k holders as of March 2022.
FEI Protocol was founded in December of 2020 and attracted investments from well known technology and crypto venture funds such as a16Z, Coinbase Ventures, and Nascent.
Tokenomics
Fei: the token has no maximum supply, the amount Fei is minted and burned based on supply and demand along the bonding curve. The market cap at the time of publication (March 2022) is 426 million tokens.
Uniswap
Sushiswap
Ox Protocol
MDEX
1INCH
Hoo
BKEK
Hotbit
MEXC
Tribe (DAO Governance Token): The total supply of TRIBE is 1 billion. The current circulating supply of TRIBE is 415 million. 80% is distributed to the DAO, 15% to the team with a back-weighted time-lock of five years, and 5% to investors with a linear time-lock.
40% Dao Treasury
20% Initial Dex Offering (Immediate Liquidity)
13% FEI Core Team (Back Weighted Time Lock (5 years))
10% Genesis Group (Immediate Liquidity)
10% Staking Rewards (2 Years Decreasing)
5% FEI Core Team Investors (Linear Time Lock 2 years)
2% Grants (Immediate Liquidity)
Binance
Coinbase
Uniswap
Huobi
KuCoin
1INCH
Mandala
Zt
Hoo
MEXC
The Team
Joey Santoro is the founder at Fei Protocol and the CEO of Fei Labs. His background is in software engineering and crypto. Prior to Fei he has been a software engineer at Okta Inc, a software company, helping businesses manage digital identities. He graduated from Duke University, majoring in computer science in 2019, where he also has served as a research assistant and co-president of the local Blockchain Lab.
Brianna Montgomery is the project’s business lead. Prior to joining the Fei team she has worked as a business lead at ConsenSys, a blockchain studio, building projects on Ethereum. She had a successful career featuring similar roles in a few other tech companies, including Coriant, DefenseStorm and nCino. She has a magna cum laude degree in business administration, marketing and economics from University of North Carolina at Wilmington
Sebastian Delgado is the third co-founder of Fei Protocol. His experience includes serving more than two years at a DeFi project Dharma Labs as a software engineer and even longer at Uber in the same role. He graduated from the UС Berkeley with degrees in cognitive science and computer science.
FEI Protocol Mechanics
Protocol Controlled Value (PCV) is the core of Fei and was pioneered by the team at Fei labs, this new model flips the old “Total Value” (TVL) in which users deposited funds and receive an IOU and can withdrawal these assets at any time (expect when a time lock is on deposits). Protocols incentivize TVL with extra high interest rates or token emissions to gain capital; while this has been very successful in the past it leads to the issue of mercenary capital coming in for the initial incentives and leaving once the emissions normalize. This leads to an unsustainable model to capitalize the protocol in the long run as when/if a large amount of capital leaves it creates fears of a “rug pull” and can increase the speed of liquidity existing the protocol.
The PCV model that Fei Labs has created is meant to solve the issues of mercenary capital in the TVL model by having the protocol own the assets locked into the smart contracts. Rather than an IOU the PCV model is permanent. PCV allows the flexibility to engage in activities that align with the goals of the of the protocol such as stabilizing the peg; this is very similar to an insurance fund model.
At launch 100% of the PCV funded by the eth bonding curve went into the Uniswap pool of ETH/FEI . Governance (TRIBE DAO) can allocate PCV to places other than Uniswap (it has in V2) if it aligns with the goals of FEI. The protocol mints FEI to match the ETH deposited to create the liquidity needed for the swap pair; the liquidity should stay equal to the circulating supply of FEI. This allows deep liquidity in the pool and offers security against a large seller pulling out the PCV from the pair. It also allows reweights in periods when the price of FEI falls below the peg by executing atomic trades:
TRIBE Token and TRIBE DAO
Tribe is the governance token of TRIBE DAO which is the governance behind the Fei Protocol. TRIBE the token has a supply cap of 1 billion tokens. Fei uses five system roles for governance and decision making in the DAO:
Governor
Most powerful, grants and revokes other roles, controls many protocol parameters
Minter
Creates FEI and can add to any address
Burner
Removes Portions of FEI from any address
PCV Controller
Can move PCV from contracts and redeploy. Typically done to reweight the peg and facilitate integrations.
Guardian
Quick feature shutdown during unforeseen black swan style events, it has the ability to force reweights
Tribe Dao has an active discord with over 1200 members. The core team is very active in the discord.
Tribe Dao Discord: https://discord.com/invite/2prhYdQ5jP
Fei as a Stable Coin
All the stable coins in the market today face the “Trilemma”
Price stable* — Unlike BTC, tokens that are intended to be treated as cash equivalents need to have stable purchasing power*
Capital Efficient* — Having to lock up more than $1 of collateral to create $1 of stablecoins is inefficient and leads to stablecoin supply constraints (Example Maker DAO and DAI)*
***Decentralized ***— i.e., the collateral is not held by a single entity, such as is the case with Tether and the Centre Consortium (Example UST and USDC)
FEI was born to solve all three of these issues through a variety of mechanisms and continues to iterate on these ideas to create a brand-new form of stable coin. Let’s look at FEI version one which could be considered a disaster by some, or as the founder of Fei “Joey Santoro” put it “a fantastic learning experience and tough growing pains”.
History Of Fei V1
What happened when FEI V1 Launched? During the token Genesis users were able to mint FEI from the ETH bonding curve for up to a 50% discount. When a user did this they were also then eligible for the airdrop of “TRIBE” the governance token of FEI protocol. Over 17,000 unique wallets signed up for the genesis event. The terms of the discount stated that it only applied if under 250 million in ETH was contributed, since over 1.3 Billion in ETH was raised at the launch the discount was no longer in play and the ETH was given to the PCV “protocol controlled value” which “gives the protocol more flexibility to engage in activities that are not profit oriented”; the entire sum of the PCV at genesis was used to build initial liquidity on Uniswap (largest pool allocation in Uniswap history).
Fei loses it’s Peg at Launch
The peg was lost at genesis mostly due to a “pre-swap” option that allowed token holders to swap FEI tokens for TRIBE upon launch, this created lots of selling pressure against FEI. The protocol is set up to punish sellers of FEI and reward those who buy it whenever FEI loses its peg. In this instance the swap pair ‘FEI-TRIBE” represented 98% of the liquidity for TRIBE; users who were selling TRIBE for ETH were forced to take the punishment for selling FEI as they were routed through the FEI-TRIBE pair, they could also lose more value from slippage due to the lower liquidity in the TRIBE-ETH Pool.
FEI while being audited by “Consensys Diligence” and “Open Zeppelin” a vulnerability was found in the incentive calculation of FEI. This caused the team to shut down minting rewards and state publicly that “reweights will still occur without mint rewards”
Twitter Thread from Emin Gun Sirer on FEI launch woes (https://twitter.com/el33th4xor/status/1379759409111392265?s=20)
Algorithmic Stablecoins work well when demand is high, simply mint more coins and keep the price at one dollar, but what happens when selling pressure brings the peg down below one dollar? During these periods it is possible for the coin to diverge so far from the peg that leaves the zone called “the feasibility envelope”. In this case Fei designed the protocol to “punish sellers when the price fell below the peg” and the lower the price the bigger the punishment! If you sell FEI below the peg the recipient receives fewer FEI than you transferred taking some of the transaction out of circulation to help boost the price. The problem with this method is when you sell an asset a buyer is on the other side, in this model the buyer is getting less FEI than they paid for, bringing demand even lower as both buyer and seller were punished in the transaction. FEI may be priced at $0.87 (estimated) but if the penalty rate was high due to selling pressure you might only receive $0.50 (estimated) when you sell during a draw down in FEI V1.
It took over three months for FEI to regain it’s peg after the initial genesis failure. The team at FEI protocol made the key change to fix the issue was to introduce $1 — $1 redeemability of Fei with the underlying PCV. This allowed FEI to resume it’s $1 peg and has since maintained it’s price stability ever since this change was implemented and the bug in the code patched.
Introducing FEI V2
On 12/15/2021 Fei V2 went live with a large number of upgrades and updates that were created by the learned experience of the failures and solutions to the issues faced in version one. Two major pieces make up the shift to V2:
Tribal Council is a profit sharing and back stop mechanism for Fei; in V2 a mechanism was added that mints tribe and is sold for Fei as soon as the collateralization rate drops below 100%. This mechanism is similar to normal reserve stabilization that sells PCV for FEI when the Fei price dips below the threshold set by governance.
In return for the added risk TRIBE holders face with this backstop method TRIBE would earn a percentage of the PCV equity (PCV value — user circulating FEI) each year via buybacks, as compensation for bearing the risk of inflation in the event of under collateralization. FEI would be minted to buy TRIBE off of the most liquid AMM (currently the FEI-TRIBE Uniswap V2 LP pool) and distribute back via staking rewards. A portion of this TRIBE would go back to the DAO treasury, which could be used to pay for development, liquidity incentives, or as a buffer against inflation.
The rationale behind using PCV equity is that TRIBE should only receive rewards for being overcollateralized, thus in turn incentivizing risk management and a longer time horizon. This feature would require a manipulation resistant collateralization ratio oracle on-chain.
Likewise only distributing a percentage as opposed to 100% of the equity will maintain a healthy PCV buffer to absorb volatility without inflating TRIBE.
For example, if the PCV equity is 500m and the distribution rate is 5%, then 25m FEI would be minted over the course of the year to buy TRIBE and distribute back to stakers.
Algorithmic PCV management allows Fei to use the underlying assets in the PCV to be lent out to earn yield increasing the underlying PCV and the price of TRIBE through a buy back mechanism. Fei is controlling the risk of lending activities by allocating more of its assets to stable ones like DAI as the collateralization ratio approaches 100%. Fei does this automatically using Balancer’s Investment pool.
By allocating to stable assets as it approaches 100% Fei ensures the protocol will not be insolvent and the peg will not be lost.
By introducing the explicit relationship of TRIBE absorbing PCV volatility, TRIBE becomes effectively levered on PCV depending on how much FEI there is in circulation. To take some extreme examples, if there are no circulating FEI then TRIBE would simply earn rewards from the entire PCV in perpetuity. If there was exactly as much user FEI in circulation as PCV, then TRIBE has no rewards and small movements in PCV have a large impact on PCV equity.
In it’s essence V2 has created three ways for FEI to maintain it’s $1 peg and uses them in cascading order :
Balancer V2 Investment Pool management
1–1 Redeemability of FEI with PCV controlled by the TRIBE DAO
TRIBE Backstop
Rari Merger
On 12/2/2/2022 Fei and Rari announced the largest token merge in crypto history in a landmark move by two complimentary crypto protocols. While Rari Capital and Fei Labs will stay separate entities, the DAOs have been merged under the banner of TRIBE. The merger creates a 2 billion dollar liquidity giant. A DAO merge took place and all RGT (Rari’s governance token) was converted to TRIBE tokens.
“I think the broader community really sees the vision of the proposal as reflected in the massively in-favor and high participation on-chain votes,” Fei co-founder Joey Santoro told The Defiant. “Tribe is no longer about FEI or Fuse alone, but rather building tightly integrated DeFi solutions for DAOs such as Liquidity as a service and new upcoming offerings such as Turbo.”
Quick overview of Rari
Rari is an industry leading yield aggregator using a variety of different yield strategies users can deploy to gain yield on assets. Rari’s killer product is called “Fuse Pools”, these pools allow users to create their own lending/borrowing market like Aave and Compound. Users can customize what collateral can be used, reserve factors, liquidations, administrative fees, interest rate models and more.
Fuse Pool Capabilities:
Treasury Management for Defi Protocols: Most defi protocols hold entire treasury in native token, can’t access the liquidity without dumping the coins on the market.
Use NFTs as Collateral: Crypto Punks and Apes can be used to borrow against or short against them
Borrow Against LP tokens : Deposit LP tokens from Uniswap and get liquidity
Borrow Against Synthetic Assets: buy mTesla on Mirror and borrow against it
Borrow Against Options
Leveraged yield farm any protocol
Leverage your leveraged yield farm token from Alpha Hemora
Borrow Against Staked Assets
Delta neutral Strategies on any token
Leverage any assets
The founder of both Fei and Rari feel the move is synergetic as Fei is a liquidity engine allowing FEI to increase the rewards in the PCV while providing liquidity to new tokens and rewards for TRIBE holders. Rari’s FUSE pools allow anyone to provide liquidity for any asset; as Joey from FEI put it “we are a match made in heaven”.
Liquidity as a Service (LaaS)
Fei Protocol partnered with Ondo finance in October of 2021 to offer LaaS to create AMM (automatic market maker) pairs for other token projects. Currently to create a pool for a DAO or protocol a token must be sold from the treasury to create the pair. An incentivized offer must be made to attract enough liquidity to create the pair; this issue often leads to mercenary capital coming in for the high rewards and leaving when the rewards dry up. The other issue DAOs or protocol treasuries face is impermanent loss and opportunity cost for use of the treasury. From FEI protocol’s press release on LaaS:
DeFi moves at warp speed, so we at Fei partnered with Ondo to deliver an offering to allow teams to access LaaS with no upfront costs or long-term commitments. LaaS enables teams to have the flexibility they need. If a new alternative emerges or sufficient capital is available to own all liquidity, teams can pivot and redeem their position to leave LaaS. LaaS will use Ondo’s unique liquidity vaults for this offering. These vaults are structured financial products that allow different parties to take on different risks when they contribute liquidity to a common AMM pair. Approved projects can deposit their project token into an Ondo liquidity vault with a flexible duration, and Fei Protocol will match their deposit with an equivalent amount of FEI. The tokens are deployed as liquidity onto DEXs, such as Uniswap or SushiSwap.
This arrangement provides immediate liquidity, and essentially doubles the liquidity (for example: 5M supplied by ABC DAO + 5M FEI). Double the liquidity means a healthier market with less slippage for users interested in buying the token. After a predetermined duration, the Ondo vault returns all remaining FEI to Fei Protocol plus a small fixed fee, and returns all remaining project tokens back to the project. The project keeps trading fees and assumes any impermanent loss. LaaS can be a source of revenue for DAOs, rather than a sunk cost. Even with negative price action, LaaS can still cost less than traditional liquidity mining incentives
Tribe Turbo
Launching in March of 2022, Tribe Turbo is a cost-effective way to bootstrap liquidity by allowing a Defi token to become a productive asset by sharing in the yield generated from a FEI credit line at essentially no cost. From Fei’s medium post on Tribe Turbo:
*Historically, Fei Protocol supplied several million FEI into verified Fuse pools, which were utilized by various DAOs (like ShapeShift) to borrow FEI against their governance tokens. These funds were utilized for ongoing DAO operations and contributor compensation, effectively making Fuse pools into a treasury management tool. Tribe Turbo brings these DAO-2-DAO partnerships to the next level. Tribe Turbo uses a novel architecture on top of a Fuse pool called the “Turbo Pool”. Supported collateral types can borrow (issue) FEI (USD stablecoin) at 0% interest through “Turbo Safes”. The Turbo Safe ensures that the borrowed FEI is subsequently (atomically) deposited into a yield strategy of the user’s choosing. Users can optimize for interest earned or provide borrowable capital to users against protocol tokens. Tribe Turbo enables DAOs (and degens) to issue FEI, at no cost, into a Fuse pool(s) of their choice, while benefiting from a revenue split with the Tribe DAO. Turbo also accelerates the lending liquidity on Fuse by separating the stablecoin issuance from market driven lending via Turbo. Initial FEI strategies will focus on delta-neutral strategies such as Fuse lending, yield aggregation, or stable swap liquidity provision. Any **ERC-4626 yield generating *vault will be eligible for Turbo, subject to TRIBE governance whitelisting.
Tribe Turbo is an advantageous tool for new token launches in DeFi and DAO governance allowing both the new entrant to bootstrap liquidity and create a market maker for the token while incentivizing TRIBE holders with a revenue split of the swap fees. Not only can the token issuer create a FUSE pool for FEI, but they can also use FUSE’s suite of tools to allow many different token centric strategies to be placed into the FUSE pool.
Example:
Bankless wants to use Tribe Turbo to create a new market for BANK, Bankless would go to Tribe Turbo, deposit BANK tokens into a “Turbo Safe” and boost FEI borrow at 0% apy and deposit into a yield strategy using BANK-FEI pair. Then they could also create pools for other borrowed LP token assets such as BANK-USDC (from Uniswap) or BANK-ETH LP token (from Sushi Swap) into the FUSE pool to create additional liquidity in the fuse pool. Bankless and TRIBE would split the revenue from the turbo strategy. Market rates are determined by utilization in the FUSE model and incentives both parties to participate and reap the rewards.
Tribe Turbo is a killer use case where permissionless lending and decentralized stablecoins come together and demonstrates the power of the newly merged Tribe DAO (previously Rari Capital DAO and Fei Protocol DAO). Fuse unlocks capital for long tail crypto assets through permissionless lending markets, which isolate risk.
Conclusion
FEI is an innovative and decentralized approach to stable coins with a mix of old and new peg strategies. Tribe is a large DAO with over 2 billion in PCV that can be used to backstop the peg of FEI as well as earn yield in a variety of DeFi native ways. Tribe Turbo is a brand new and innovative way for DAOs and other governance projects to bootstrap liquidity and build solid and stable swap pairs across DeFi and benefit both TRIBE and the new DAO simultaneously.
Sources:
https://fei.money/static/media/whitepaper.7d5e2986.pdf
https://docs.fei.money/governance/tribe
https://coinmarketcap.com/currencies/fei-usd/
https://coinmarketcap.com/currencies/tribe/
https://medium.com/fei-protocol/introducing-fei-protocol-2db79bd7a82b
https://byrnehobart.medium.com/the-stablecoin-trilemma-d763ff64a6eb
https://medium.com/fei-protocol/fei-v2-is-coming-e0bae727a9dc
https://thedefiant.io/fei-protocol-is-still-swinging-after-rocky-start-and-launches-v2/
https://tribe.fei.money/t/fei-v2-design-discussion/3467
Fei Protocol Research Report
By: Joe King 3/22/22
THESE STATEMENTS SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.
Project Overview
FEI is a decentralized scalable and Defi-Native stablecoin protocol built on the Ethereum block chain. FEI is a 1 to 1 stable coin pegged to the US dollar providing redeemability for FEI using “protocol controlled value” (PCV). The aim of FEI token is to propose a balance between the models of overcollateralized decentralized stable coins (DAI) and centralized custodial stable coins (USDC, Tether). FEI uses the value it controls to maintain secondary markets and earn yield for the protocol through a variety of decentralized mechanisms.
FEI has two tokens associated with the protocol: FEI (stable coin) and TRIBE (governance token). The TRIBE DAO (Decentralized Autonomous Organization) is a partial moderator for FEI protocol and governance for FEI is being migrated over to the DAO over time with the final goal of becoming fully decentralized.
The Fei token is a fully decentralized stablecoin and is designed to allow upgrades and incentive mechanisms for the intent to maintain the $1 Peg. FEI is collateralized by a PCV reserve. Market CAP is under 500M (426 at the time of writing), with 3905 holders of the token.
TRIBE token is a governance token that manages the protocol, max supply capped at 1 Billion. 13k holders as of March 2022.
FEI Protocol was founded in December of 2020 and attracted investments from well known technology and crypto venture funds such as a16Z, Coinbase Ventures, and Nascent.
Tokenomics
Fei: the token has no maximum supply, the amount Fei is minted and burned based on supply and demand along the bonding curve. The market cap at the time of publication (March 2022) is 426 million tokens.
Uniswap
Sushiswap
Ox Protocol
MDEX
1INCH
Hoo
BKEK
Hotbit
MEXC
Tribe (DAO Governance Token): The total supply of TRIBE is 1 billion. The current circulating supply of TRIBE is 415 million. 80% is distributed to the DAO, 15% to the team with a back-weighted time-lock of five years, and 5% to investors with a linear time-lock.
40% Dao Treasury
20% Initial Dex Offering (Immediate Liquidity)
13% FEI Core Team (Back Weighted Time Lock (5 years))
10% Genesis Group (Immediate Liquidity)
10% Staking Rewards (2 Years Decreasing)
5% FEI Core Team Investors (Linear Time Lock 2 years)
2% Grants (Immediate Liquidity)
Binance
Coinbase
Uniswap
Huobi
KuCoin
1INCH
Mandala
Zt
Hoo
MEXC
The Team
Joey Santoro is the founder at Fei Protocol and the CEO of Fei Labs. His background is in software engineering and crypto. Prior to Fei he has been a software engineer at Okta Inc, a software company, helping businesses manage digital identities. He graduated from Duke University, majoring in computer science in 2019, where he also has served as a research assistant and co-president of the local Blockchain Lab.
Brianna Montgomery is the project’s business lead. Prior to joining the Fei team she has worked as a business lead at ConsenSys, a blockchain studio, building projects on Ethereum. She had a successful career featuring similar roles in a few other tech companies, including Coriant, DefenseStorm and nCino. She has a magna cum laude degree in business administration, marketing and economics from University of North Carolina at Wilmington
Sebastian Delgado is the third co-founder of Fei Protocol. His experience includes serving more than two years at a DeFi project Dharma Labs as a software engineer and even longer at Uber in the same role. He graduated from the UС Berkeley with degrees in cognitive science and computer science.
FEI Protocol Mechanics
Protocol Controlled Value (PCV) is the core of Fei and was pioneered by the team at Fei labs, this new model flips the old “Total Value” (TVL) in which users deposited funds and receive an IOU and can withdrawal these assets at any time (expect when a time lock is on deposits). Protocols incentivize TVL with extra high interest rates or token emissions to gain capital; while this has been very successful in the past it leads to the issue of mercenary capital coming in for the initial incentives and leaving once the emissions normalize. This leads to an unsustainable model to capitalize the protocol in the long run as when/if a large amount of capital leaves it creates fears of a “rug pull” and can increase the speed of liquidity existing the protocol.
The PCV model that Fei Labs has created is meant to solve the issues of mercenary capital in the TVL model by having the protocol own the assets locked into the smart contracts. Rather than an IOU the PCV model is permanent. PCV allows the flexibility to engage in activities that align with the goals of the of the protocol such as stabilizing the peg; this is very similar to an insurance fund model.
At launch 100% of the PCV funded by the eth bonding curve went into the Uniswap pool of ETH/FEI . Governance (TRIBE DAO) can allocate PCV to places other than Uniswap (it has in V2) if it aligns with the goals of FEI. The protocol mints FEI to match the ETH deposited to create the liquidity needed for the swap pair; the liquidity should stay equal to the circulating supply of FEI. This allows deep liquidity in the pool and offers security against a large seller pulling out the PCV from the pair. It also allows reweights in periods when the price of FEI falls below the peg by executing atomic trades:
TRIBE Token and TRIBE DAO
Tribe is the governance token of TRIBE DAO which is the governance behind the Fei Protocol. TRIBE the token has a supply cap of 1 billion tokens. Fei uses five system roles for governance and decision making in the DAO:
Governor
Most powerful, grants and revokes other roles, controls many protocol parameters
Minter
Creates FEI and can add to any address
Burner
Removes Portions of FEI from any address
PCV Controller
Can move PCV from contracts and redeploy. Typically done to reweight the peg and facilitate integrations.
Guardian
Quick feature shutdown during unforeseen black swan style events, it has the ability to force reweights
Tribe Dao has an active discord with over 1200 members. The core team is very active in the discord.
Tribe Dao Discord: https://discord.com/invite/2prhYdQ5jP
Fei as a Stable Coin
All the stable coins in the market today face the “Trilemma”
Price stable* — Unlike BTC, tokens that are intended to be treated as cash equivalents need to have stable purchasing power*
Capital Efficient* — Having to lock up more than $1 of collateral to create $1 of stablecoins is inefficient and leads to stablecoin supply constraints (Example Maker DAO and DAI)*
***Decentralized ***— i.e., the collateral is not held by a single entity, such as is the case with Tether and the Centre Consortium (Example UST and USDC)
FEI was born to solve all three of these issues through a variety of mechanisms and continues to iterate on these ideas to create a brand-new form of stable coin. Let’s look at FEI version one which could be considered a disaster by some, or as the founder of Fei “Joey Santoro” put it “a fantastic learning experience and tough growing pains”.
History Of Fei V1
What happened when FEI V1 Launched? During the token Genesis users were able to mint FEI from the ETH bonding curve for up to a 50% discount. When a user did this they were also then eligible for the airdrop of “TRIBE” the governance token of FEI protocol. Over 17,000 unique wallets signed up for the genesis event. The terms of the discount stated that it only applied if under 250 million in ETH was contributed, since over 1.3 Billion in ETH was raised at the launch the discount was no longer in play and the ETH was given to the PCV “protocol controlled value” which “gives the protocol more flexibility to engage in activities that are not profit oriented”; the entire sum of the PCV at genesis was used to build initial liquidity on Uniswap (largest pool allocation in Uniswap history).
Fei loses it’s Peg at Launch
The peg was lost at genesis mostly due to a “pre-swap” option that allowed token holders to swap FEI tokens for TRIBE upon launch, this created lots of selling pressure against FEI. The protocol is set up to punish sellers of FEI and reward those who buy it whenever FEI loses its peg. In this instance the swap pair ‘FEI-TRIBE” represented 98% of the liquidity for TRIBE; users who were selling TRIBE for ETH were forced to take the punishment for selling FEI as they were routed through the FEI-TRIBE pair, they could also lose more value from slippage due to the lower liquidity in the TRIBE-ETH Pool.
FEI while being audited by “Consensys Diligence” and “Open Zeppelin” a vulnerability was found in the incentive calculation of FEI. This caused the team to shut down minting rewards and state publicly that “reweights will still occur without mint rewards”
Twitter Thread from Emin Gun Sirer on FEI launch woes (https://twitter.com/el33th4xor/status/1379759409111392265?s=20)
Algorithmic Stablecoins work well when demand is high, simply mint more coins and keep the price at one dollar, but what happens when selling pressure brings the peg down below one dollar? During these periods it is possible for the coin to diverge so far from the peg that leaves the zone called “the feasibility envelope”. In this case Fei designed the protocol to “punish sellers when the price fell below the peg” and the lower the price the bigger the punishment! If you sell FEI below the peg the recipient receives fewer FEI than you transferred taking some of the transaction out of circulation to help boost the price. The problem with this method is when you sell an asset a buyer is on the other side, in this model the buyer is getting less FEI than they paid for, bringing demand even lower as both buyer and seller were punished in the transaction. FEI may be priced at $0.87 (estimated) but if the penalty rate was high due to selling pressure you might only receive $0.50 (estimated) when you sell during a draw down in FEI V1.
It took over three months for FEI to regain it’s peg after the initial genesis failure. The team at FEI protocol made the key change to fix the issue was to introduce $1 — $1 redeemability of Fei with the underlying PCV. This allowed FEI to resume it’s $1 peg and has since maintained it’s price stability ever since this change was implemented and the bug in the code patched.
Introducing FEI V2
On 12/15/2021 Fei V2 went live with a large number of upgrades and updates that were created by the learned experience of the failures and solutions to the issues faced in version one. Two major pieces make up the shift to V2:
Tribal Council is a profit sharing and back stop mechanism for Fei; in V2 a mechanism was added that mints tribe and is sold for Fei as soon as the collateralization rate drops below 100%. This mechanism is similar to normal reserve stabilization that sells PCV for FEI when the Fei price dips below the threshold set by governance.
In return for the added risk TRIBE holders face with this backstop method TRIBE would earn a percentage of the PCV equity (PCV value — user circulating FEI) each year via buybacks, as compensation for bearing the risk of inflation in the event of under collateralization. FEI would be minted to buy TRIBE off of the most liquid AMM (currently the FEI-TRIBE Uniswap V2 LP pool) and distribute back via staking rewards. A portion of this TRIBE would go back to the DAO treasury, which could be used to pay for development, liquidity incentives, or as a buffer against inflation.
The rationale behind using PCV equity is that TRIBE should only receive rewards for being overcollateralized, thus in turn incentivizing risk management and a longer time horizon. This feature would require a manipulation resistant collateralization ratio oracle on-chain.
Likewise only distributing a percentage as opposed to 100% of the equity will maintain a healthy PCV buffer to absorb volatility without inflating TRIBE.
For example, if the PCV equity is 500m and the distribution rate is 5%, then 25m FEI would be minted over the course of the year to buy TRIBE and distribute back to stakers.
Algorithmic PCV management allows Fei to use the underlying assets in the PCV to be lent out to earn yield increasing the underlying PCV and the price of TRIBE through a buy back mechanism. Fei is controlling the risk of lending activities by allocating more of its assets to stable ones like DAI as the collateralization ratio approaches 100%. Fei does this automatically using Balancer’s Investment pool.
By allocating to stable assets as it approaches 100% Fei ensures the protocol will not be insolvent and the peg will not be lost.
By introducing the explicit relationship of TRIBE absorbing PCV volatility, TRIBE becomes effectively levered on PCV depending on how much FEI there is in circulation. To take some extreme examples, if there are no circulating FEI then TRIBE would simply earn rewards from the entire PCV in perpetuity. If there was exactly as much user FEI in circulation as PCV, then TRIBE has no rewards and small movements in PCV have a large impact on PCV equity.
In it’s essence V2 has created three ways for FEI to maintain it’s $1 peg and uses them in cascading order :
Balancer V2 Investment Pool management
1–1 Redeemability of FEI with PCV controlled by the TRIBE DAO
TRIBE Backstop
Rari Merger
On 12/2/2/2022 Fei and Rari announced the largest token merge in crypto history in a landmark move by two complimentary crypto protocols. While Rari Capital and Fei Labs will stay separate entities, the DAOs have been merged under the banner of TRIBE. The merger creates a 2 billion dollar liquidity giant. A DAO merge took place and all RGT (Rari’s governance token) was converted to TRIBE tokens.
“I think the broader community really sees the vision of the proposal as reflected in the massively in-favor and high participation on-chain votes,” Fei co-founder Joey Santoro told The Defiant. “Tribe is no longer about FEI or Fuse alone, but rather building tightly integrated DeFi solutions for DAOs such as Liquidity as a service and new upcoming offerings such as Turbo.”
Quick overview of Rari
Rari is an industry leading yield aggregator using a variety of different yield strategies users can deploy to gain yield on assets. Rari’s killer product is called “Fuse Pools”, these pools allow users to create their own lending/borrowing market like Aave and Compound. Users can customize what collateral can be used, reserve factors, liquidations, administrative fees, interest rate models and more.
Fuse Pool Capabilities:
Treasury Management for Defi Protocols: Most defi protocols hold entire treasury in native token, can’t access the liquidity without dumping the coins on the market.
Use NFTs as Collateral: Crypto Punks and Apes can be used to borrow against or short against them
Borrow Against LP tokens : Deposit LP tokens from Uniswap and get liquidity
Borrow Against Synthetic Assets: buy mTesla on Mirror and borrow against it
Borrow Against Options
Leveraged yield farm any protocol
Leverage your leveraged yield farm token from Alpha Hemora
Borrow Against Staked Assets
Delta neutral Strategies on any token
Leverage any assets
The founder of both Fei and Rari feel the move is synergetic as Fei is a liquidity engine allowing FEI to increase the rewards in the PCV while providing liquidity to new tokens and rewards for TRIBE holders. Rari’s FUSE pools allow anyone to provide liquidity for any asset; as Joey from FEI put it “we are a match made in heaven”.
Liquidity as a Service (LaaS)
Fei Protocol partnered with Ondo finance in October of 2021 to offer LaaS to create AMM (automatic market maker) pairs for other token projects. Currently to create a pool for a DAO or protocol a token must be sold from the treasury to create the pair. An incentivized offer must be made to attract enough liquidity to create the pair; this issue often leads to mercenary capital coming in for the high rewards and leaving when the rewards dry up. The other issue DAOs or protocol treasuries face is impermanent loss and opportunity cost for use of the treasury. From FEI protocol’s press release on LaaS:
DeFi moves at warp speed, so we at Fei partnered with Ondo to deliver an offering to allow teams to access LaaS with no upfront costs or long-term commitments. LaaS enables teams to have the flexibility they need. If a new alternative emerges or sufficient capital is available to own all liquidity, teams can pivot and redeem their position to leave LaaS. LaaS will use Ondo’s unique liquidity vaults for this offering. These vaults are structured financial products that allow different parties to take on different risks when they contribute liquidity to a common AMM pair. Approved projects can deposit their project token into an Ondo liquidity vault with a flexible duration, and Fei Protocol will match their deposit with an equivalent amount of FEI. The tokens are deployed as liquidity onto DEXs, such as Uniswap or SushiSwap.
This arrangement provides immediate liquidity, and essentially doubles the liquidity (for example: 5M supplied by ABC DAO + 5M FEI). Double the liquidity means a healthier market with less slippage for users interested in buying the token. After a predetermined duration, the Ondo vault returns all remaining FEI to Fei Protocol plus a small fixed fee, and returns all remaining project tokens back to the project. The project keeps trading fees and assumes any impermanent loss. LaaS can be a source of revenue for DAOs, rather than a sunk cost. Even with negative price action, LaaS can still cost less than traditional liquidity mining incentives
Tribe Turbo
Launching in March of 2022, Tribe Turbo is a cost-effective way to bootstrap liquidity by allowing a Defi token to become a productive asset by sharing in the yield generated from a FEI credit line at essentially no cost. From Fei’s medium post on Tribe Turbo:
*Historically, Fei Protocol supplied several million FEI into verified Fuse pools, which were utilized by various DAOs (like ShapeShift) to borrow FEI against their governance tokens. These funds were utilized for ongoing DAO operations and contributor compensation, effectively making Fuse pools into a treasury management tool. Tribe Turbo brings these DAO-2-DAO partnerships to the next level. Tribe Turbo uses a novel architecture on top of a Fuse pool called the “Turbo Pool”. Supported collateral types can borrow (issue) FEI (USD stablecoin) at 0% interest through “Turbo Safes”. The Turbo Safe ensures that the borrowed FEI is subsequently (atomically) deposited into a yield strategy of the user’s choosing. Users can optimize for interest earned or provide borrowable capital to users against protocol tokens. Tribe Turbo enables DAOs (and degens) to issue FEI, at no cost, into a Fuse pool(s) of their choice, while benefiting from a revenue split with the Tribe DAO. Turbo also accelerates the lending liquidity on Fuse by separating the stablecoin issuance from market driven lending via Turbo. Initial FEI strategies will focus on delta-neutral strategies such as Fuse lending, yield aggregation, or stable swap liquidity provision. Any **ERC-4626 yield generating *vault will be eligible for Turbo, subject to TRIBE governance whitelisting.
Tribe Turbo is an advantageous tool for new token launches in DeFi and DAO governance allowing both the new entrant to bootstrap liquidity and create a market maker for the token while incentivizing TRIBE holders with a revenue split of the swap fees. Not only can the token issuer create a FUSE pool for FEI, but they can also use FUSE’s suite of tools to allow many different token centric strategies to be placed into the FUSE pool.
Example:
Bankless wants to use Tribe Turbo to create a new market for BANK, Bankless would go to Tribe Turbo, deposit BANK tokens into a “Turbo Safe” and boost FEI borrow at 0% apy and deposit into a yield strategy using BANK-FEI pair. Then they could also create pools for other borrowed LP token assets such as BANK-USDC (from Uniswap) or BANK-ETH LP token (from Sushi Swap) into the FUSE pool to create additional liquidity in the fuse pool. Bankless and TRIBE would split the revenue from the turbo strategy. Market rates are determined by utilization in the FUSE model and incentives both parties to participate and reap the rewards.
Tribe Turbo is a killer use case where permissionless lending and decentralized stablecoins come together and demonstrates the power of the newly merged Tribe DAO (previously Rari Capital DAO and Fei Protocol DAO). Fuse unlocks capital for long tail crypto assets through permissionless lending markets, which isolate risk.
Conclusion
FEI is an innovative and decentralized approach to stable coins with a mix of old and new peg strategies. Tribe is a large DAO with over 2 billion in PCV that can be used to backstop the peg of FEI as well as earn yield in a variety of DeFi native ways. Tribe Turbo is a brand new and innovative way for DAOs and other governance projects to bootstrap liquidity and build solid and stable swap pairs across DeFi and benefit both TRIBE and the new DAO simultaneously.
Sources:
https://fei.money/static/media/whitepaper.7d5e2986.pdf
https://docs.fei.money/governance/tribe
https://coinmarketcap.com/currencies/fei-usd/
https://coinmarketcap.com/currencies/tribe/
https://medium.com/fei-protocol/introducing-fei-protocol-2db79bd7a82b
https://byrnehobart.medium.com/the-stablecoin-trilemma-d763ff64a6eb
https://medium.com/fei-protocol/fei-v2-is-coming-e0bae727a9dc
https://thedefiant.io/fei-protocol-is-still-swinging-after-rocky-start-and-launches-v2/
https://tribe.fei.money/t/fei-v2-design-discussion/3467
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