What is Fei Protocol
What Is Fei Protocol (FEI)?
Fei protocol is an algorithmic stablecoin for DeFi. The aim of Fei is to propose a technological solution in a sweet spot between rigid overcollateralized traditional stablecoin and unpredictable but centralised existing algorithmic stablecoins.
Fei Protocol runs on two crypto assets: FEI stablecoin and TRIBE governance token.
FEI is based on a novel kind of stablecoin mechanism called direct incentives. It aimed to be more capital efficient, feature a fair distribution and to be fully decentralized. The protocol uses the value it controls to maintain liquid secondary markets.
The project was founded in December 2020 and immediately attracted significant interest in the crypto community. It resulted in $19 million VC investment in early March 2021. Among the names that have entered this project are Andreessen Horowitz (a16z), Coinbase Ventures, Nascent and Framework Ventures.
The FEI genesis launch event was held as an IDO (initial defi offering) at the end of March and was finished by Apr. 3, 2021. During the event a total of 639,000 ETH was committed to the minting of the FEI stablecoin, or nearly $1.3 billion.
Shortly afterwards it started to drop in price catastrophically, revealing a critical misjudge of incentive structure multiplied by the general public’s misunderstanding of the protocol’s ways and means. Moreover, each time the algorithm tried to adjust the rates to discourage FEI selling, it only made the matters worse. At the peak of the crisis it was traded pennies on a dollar. Weeks after the event FEI has not reached the 1:1 peg leaving the future of FEI protocol in question.
Who Are the Founders of Fei Protocol?
Fei Protocol was founded by a team of Bay Area residents Joey Santoro, Brianna Montgomery and Sebastian Delgado. The decentralized stablecoin platform Fei was launched on March 31, 2021.
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
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.
The project admittedly was backed by several high profile VC funds, including Nascent Capital, Andreessen Horowitz and Coinbase Ventures and internet celebrity guru Naval Ravikant.
What Makes Fei Protocol Unique?
Stablecoins are a necessary tool for any crypto enthusiast who wants to secure their assets from undesired volatility and market fluctuations. Stablecoins are crypto assets designed to maintain a certain peg value, tethered to a fiat currency of choice, usually USD. There is no central bank for a stablecoin, or any cryptocurrency, so in order to achieve a 1:1 price parity with fiat it has to rely solely on crypto economics and sophisticated market incentive mechanics. A truly independent and effective stablecoin design is especially important in the world of decentralized finance.
Fei protocol uses several unique approaches for balancing the stablecoin peg price and protecting collateral from price shocks. First of all, it is a two-coin algorithmic stablecoin, where once coin, FEI, is trying to maintain the peg, while the other one, TRIBE is used to absorb the volatility.
Fei has a rebalancing mechanism that is activated when course deviation is prolonged. The protocol then uses its holdings of assets (PCV) to buy out and burn FEI tokens. This advantage claims to set FEI apart from other algorithmic stablecoins, and all because they don’t have a built-in function to buy back tokens in the event of a drop in demand.
Secondly, FEI is based on a so-called protocol controlled value (PCV) model. PCV is a subset of the concept of TVL (total value locked), in which a platform outright owns the assets locked into the smart contracts. This is a very novel, and, to be frank, questionable, approach, because traditionally stablecoins work as a sort of IOUs and in the end the user could always demand to take back his collateral.
Thirdly, Fei Protocol uses direct incentives to penalize trades away from the peg and reward trades towards the peg. This is supposed to modulate the FEI supply to produce a deflationary effect.
By design, when the demand for the coin is high, to create new FEI coins a user has to put their assets into a Uniswap pool and basically mint new coins, everything is simple. When the demand is low, selling the coin back will burn it automatically correcting the price. Unfortunately the underlying model failed the founders to predict that by penalising the seller selling the FEI below the peg with burning more coins than he intended, it penalises the buyer as well, virtually killing all demand for the coin alongside the supply.
Fei Protocol structure is assembled from several components: Fei Core (it’s an access control node), FEI stablecoin, binding curves, PCV deposits, PCV controllers, FEI incentives, TRIBE governance token and DAO. A protocol can be modulated, new features can be voted on by deploying a contract and granting it a role.
Find out more about Maker DAO, another algorithmic stablecoin.
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How Many Fei Protocol (FEI) Coins Are There in Circulation?
Fei is a stablecoin, like with any other stablecoin it’s max total supply is not capped. It will be minted or burned following the demand.
Fei Protocol's primary issuance mechanism for FEI are bonding curves. These bonding curves can have any parameterization but should follow a pattern: use a curve with a desirable growth rate > have a "shift" that determines the starting price > have a "Scale" target at which the curve switches to fixed relative to the oracle peg > have a "buffer" which is a percentage premium above the peg that the curve trades at post-Scale.
The Fei Core Team insists to only issue bonding curves denominated in decentralized tokens/
Fei Protocol bonding curves are buy-only, meaning that purchasers must go elsewhere to sell their FEI. The Fei Protocol prioritizes PCV liquidity with the assets it receives from the curve. Additionally, the price function of a bonding curve is not based on the total circulating supply of FEI but only based on the amount of FEI purchased on that specific bonding curve. Fei Protocol is launching with a single, ETH denominated bonding curve with plans for more as the protocol scales.
However since FEI protocol is a two-coin stablecoin, we should also pay attention to the second token, TRIBE, which is designed to absorb all the surplus value in FEI. TRIBE distribution in short is as follows: community/team/investors split is 80/15/5, where community liquidity is instant, investors have a linear time-lock and the team has back-weighted time-lock with a total of 5 year vesting.
How Is the Fei Protocol Network Secured?
FEI is a stablecoin built on Ethereum, but there are nuances. FEI is a regular ERC-20 token, based on the OpenZeppelin ERC-20 Burnable code with modifications. As such, it is secured by Ethereum’s Ethash proof-of-work algorithm and the power of the Ethereum network, second only to Bitcoin in hashpower.
Moreover, the protocol uses different user roles with varying levels of access and responsibility, their functionality pretty much defined by their signifiers: Governor, Minter, Burner, PCV Controller and Guardian. The roles are managed with the Fei Core contract.
Almost immediately after the public launch, the public was informed of an existing breach that could potentially allow a malevolent attacker to withdraw a significant portion of ETH out of the FEI Uniswap pool. The breach was discovered due to a generous bug bounty program and was reported not to have been exploited.
Where Can You Buy Fei Protocol (FEI)?
FEI is a freely tradable token, available on a number of exchanges, most of them decentralised due to the specific focus of the protocol. Exchanges trading FEI include Uniswap (V2), 1INCH, Gate.io and Ox. Another place to buy or sell FEI is through their website. Existing pairs include Ethereum, Tether (USDT) and other coins. Please do your own due diligence upon making a decision to take your money to any crypto exchange.
If you want to learn more about how to buy Bitcoin or other cryptocurrencies, read our starter’s guide, and take a look at the top DeFi tokens by market capitalization.