Stablecoins are a popular and versatile cryptocurrency in the world of decentralized finance. They help reduce the price volatility levels of cryptos in general, thus reducing risks and providing hedging opportunities within the industry. However, existing stablecoin models are still weighed down by several issues. Two major disadvantages of current stablecoin systems are that they’re often secured by other volatile cryptocurrencies, or governed by centralized third parties. Thus, current solutions are often not really decentralized, cannot be scaled, and are potentially inefficient due to over-collateralization.
The Fei protocol was developed to solve these existing problems.
With its investment in the Fei protocol, the software company Advanced Blockchain AG supports the development and usage of this improved stablecoin model, which combines price stability with complete decentralization.
What Is the Fei Protocol?
The Fei protocol is a fully decentralized stablecoin project developed by Fei Labs Inc. The project aims to improve upon the concept of stablecoins by implementing various innovations. It uses a stability mechanism called Protocol Controlled Value (PCV), as well as numerous other mechanisms to keep the Uniswap liquidity pool and FEI, its native stablecoin, close to the exchange rate of the US dollar. It also introduces a native governance token called TRIBE.
The Fei protocol managed to raise $19 million in March 2021 from major industry venture capital firms. Users who wanted to support the Fei project during its launch phase could buy tokens at a discounted price of $0.50 and up. The primary release target was set at 100 million FEI, as the development team decided this would be enough to integrate FEI into other Decentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the world of finance. Build... protocols. After the discount phase ended, users were required to invest $1.01 worth of ETH in order to issue $1 worth of FEI. This approach allowed Fei to accumulate large ETH reserves, and to quickly and efficiently provide its users with a stablecoin.
It’s important to know how the ETH token is used. The project forms an FEI/ETH liquidity pool on Uniswap (the largest decentralized exchange on Ethereum’s blockchain), which immediately provides the stablecoin with a liquid secondary market. The Fei protocol itself is the main liquidity provider for its stablecoin, which sets it apart from other algorithmic stablecoins that attract third parties by using the inflation of the token.
What Is FEI?
FEI is an ERC20 stablecoin native to the Fei protocol. It’s a decentralized stablecoin that uses various mechanisms in order to (in theory) sustain a more efficient and fairer capital distribution than other projects. The purpose of the Fei protocol is to create a liquid market where FEI/ETH can be traded closely to the ETH/USD pair.
Unlike most other tokens, FEI’s token supply is essentially unlimited. It’s governed by the minter and burner contracts that control the token release through bonding curves and trade incentives. The FEI token demonstrates certain nonstandard functions of the ERC20, but only for a subset of transactions.
The ETH bonding curve will have a target supply of 250 million FEI set as a bootstrap target. This target, also known as “Scale,” will be the mark when FEI will stabilize its price at $1.
FEI’s peg is managed by two core elements of the Fei protocol, namely:
- Protocol Controlled Value (PCV), and
- Direct incentives
While the project will launch with only one bonding curve denominated in ETH, it will allow for other curves to be created as time passes.
What Is a Stablecoin?
A stablecoin is a cryptocurrency that is tied to another asset class, such as a national currency. This usually stable and quite predictable equivalent value ensures an equally stable cryptocurrency price. Stablecoins are therefore considered relatively low-risk, low-volatility investments, especially compared to other types of cryptocurrencies.
Most stablecoin projects have developed their own stability mechanisms. Their value is generally tied to fiat currencies or other cryptocurrencies. These are called fiat-collateralized and crypto-collateralized stablecoins, respectively. However, there is another interesting category called non-collateralized stablecoins, which derive value from algorithms that adjust the token supply based on demand for the token itself.
A fiat-collateralized stablecoin derives its value from a single fiat currency, or a basket of currencies. This model is used by the likes of Tether, in which case a centralized company holds assets and issues tokens based on its holdings. These tokens represent a kind of promissory note (IOU). Such a mechanism gives tokens value because it represents a claim to another asset with a certain value. The problem with this approach, however, is that it’s centralized. With this model, a certain level of trust must be placed in the issuing party. Token holders have to trust that the token issuer owns the corresponding assets to pay out the tokens. This model leads to serious counterparty risk for token holders. Tether highlights the issues of this model, as the solvency and legitimacy of the company have been publicly questioned several times in the past.
Crypto-collateralized stablecoins derive their value from their underlying cryptocurrencies. These stablecoins are, therefore, backed by other trusted assets on the blockchain. This model was originally developed by BitShares, and is also used by other stablecoin projects. In this case, the security and stability of stablecoins are backed by another cryptocurrency. This approach’s main advantage is its decentralization. The collateral is stored on a smart contract so that users don’t have to rely on a third party. However, the main problem with this approach is the ability of projects to handle the volatility of the underlying cryptocurrency. If its value drops too quickly, the issued stablecoins may no longer be sufficiently secured. While the solution to this problem would simply be over-collateralization, this would result in inefficient use of capital, and larger amounts of money would have to be frozen as compared to the fiat model.
Non-collateralized stablecoins use algorithms to adjust their value, subject to forces of demand and supply. Depending on the coin’s current price, more stablecoins are issued to or taken away from the free market. This mechanism intends to provide counter-regulation and keep the token price as stable as possible. In this way, the system is independent of other currencies and assets. It is also decentralized, because it’s controlled exclusively by the algorithm. However, this model also has its drawbacks. The system needs continuous growth to remain stable. In addition, it’s difficult to analyze and predict the extent to which the system can remain functional and, therefore, to determine at what value the system would collapse — as well as how much it can withstand.
Who Is the Founder of the Fei Protocol (FEI)?
The Fei protocol was launched on March 31, 2021, by Joey Santoro, Brianna Montgomery, and Sebastian Delgado (left to right in the image below).
How Does Fei’s Protocol Work?
Fei is based on two innovative ideas, Protocol Controlled Value and direct incentives.
Protocol Controlled Value (PCV) is a subset of the user-owned total value locked (TVL) model used by numerous stablecoin projects. With the TVL model, users receive an IOU for their deposits and can withdraw them whenever they like (outside of the lockup period). Projects that use the TVL model have to rely on token distribution rewards, meaning that the deposited capital remains there as long as the rewards are active.
PCV tackles this system in a rather peculiar way. Unlike the aforementioned model, the Fei protocol retains the user-deposited funds permanently. By doing this, the protocol can focus on important tasks — such as maintaining the $1 peg.
This protocol owns the deposited ETH and locks it in Uniswap’s FEI/ETH LP position as the “official market.” There are two main scenarios that cause the protocol to adjust how it works:
- When FEI is below the fixed price, PCV will withdraw 99% of the protocol’s liquidity from LP to purchase FEI, bringing the price to a fixed level. The remaining PCV will be resupplied as liquidity, while excess FEI will be burned.
- When FEI is above the fixed price, PCV will determine the difference between the current and target prices, which will lead to additional FEI printing. The increase in Circulating supply is the number of cryptocurrencies or tokens that are publicly available and circulating in the crypto... will push the FEI price back to an equal level.
The protocol reweights Fei at 4-hour intervals, with the minimum distance below the fixed point being 0.5% before reweighting Uniswap prices to maintain the PCV-fixed price.
The Fei protocol’s direct incentives feature is one that, as the name suggests, incentivizes the usage and trading activity of the FEI stablecoin. It ensures that the exchange rate is stable, therefore discouraging investors from selling their tokens when the price drops below $1. When investors sell FEI, part of the FEI they sell will be burned.
The most important part of the direct incentive mechanism is the use of rewards and penalties to reach the desired FEI price. The protocol uses token minting and burning in order to maintain the $1peg.
While the incentive handles instances where the price of FEI is below the $1 mark, arbitrage takes care of those where FEI is trading above the aforementioned price. Thus, the ecosystem provides full support to the price of FEI.
How Much Is FEI?
At the time of writing, one FEI is worth $0.9993.
Source: CoinMarketCap | FEI Protocol
FEI vs. TRIBE
The Fei development team created their decentralized autonomous organization (As an open sourced blockchain ledger, Decentralized Autonomous Organization (DAO) is determined by a clear set of rules ...) with TRIBE as its governance token. The total supply of TRIBE is capped at one billion, out of which 100 million are reserved for the genesis group participants.
Holders of the TRIBE token get to vote on the Fei protocol’s future governance proposals, while being able to earn a share of the DEX’s transaction fee by contributing to the Uniswap FEI/TRIBE liquidity pool. TRIBE holders can also stake their FEI/TRIBE tokens to earn more TRIBE, with no lockups on the tokens staked.
How Many FEI Are in Circulation?
As of this writing, there are 437,749,741 FEI in circulation, with a The market capitalization (or market cap) of a cryptocurrency is a measurement of its market value. In other words, it... of $434,753,328.
FEI stablecoin does not have a maximum supply. Its supply increases or decreases according to demand. Coins enter circulation with the help of return curves, which are used to peg the FEI price at $1. When the demand for FEI increases, users can repurchase it on the bonding curve. Entry prices were initially set low to reward those who supported the project early. In addition, the Fei protocol supports the creation of new bonding curves. However, its primary bonding curve will be denominated in ETH. Even though ETH will not be sold on bonding curves, a secondary (PCV) market will be created, and users will be able to return to ETH through this market if they wish to do so.
The Fei protocol’s goal is to create a completely decentralized stablecoin that doesn’t suffer from the issues that many current stablecoin projects face. Therefore, there will be no token printing done by third parties, nor over-collateralization to safely maintain the token peg.
Is FEI a Good Investment?
The Fei protocol has three main advantages:
- Guaranteed liquidity: FEI owners don’t have to worry about crypto whales because the protocol itself is the main owner of the liquidity. It’s funded by the FEI yield curve and traded in ETH/FEI parity on Uniswap.
- Balancing support: If price support for FEI is short, the Fei protocol can adjust the Uniswap price and restore support.
- Management: Areas where PCV is used may also vary. PCV can set interest rates and pave the way for the borrowing of FEI tokens.
In the long term, the inherent utility of FEI, especially in the DeFi space, makes it a good investment.
The Bottom Line
Stablecoins form the basis of decentralized finance (DeFi). Users are looking to use Dapps like Compound and Aave without worrying about price fluctuations. However, most — if not all — existing stablecoins are inadequate at this point. Fiat-backed stablecoins such as USDT are very centralized, as their collateral is kept by a single entity. Meanwhile, crypto-backed stablecoins are facing scalability problems. In addition, such stablecoins largely require debt and leverage for transaction volumes.
However, with the usage of proprietary mechanisms, the Fei protocol can provide the stability, simplicity, and ubiquitous availability that other stablecoin projects can’t.