FEI adopted a new stabilization mechanism called “direct incentive” and proposed a new concept different from TVL that is expected to change the gameplay of leading DeFi products-PCV (Protocol Control Asset Value).
Written by: a poplar tree
On January 4th, the OCC (United States Office of the Comptroller of the Currency)’s positive stance on encouraging the banking system to adopt stablecoins actually means that stablecoins themselves have entered a brand new under the background of crazy additional issuances in 2020 and a surge in DeFi demand. In the next stage of development, whether it is in the deep binding use of the encrypted world or the cross-border payment process of “breaking the circle”, it will play a more important role.
However, the dazzling rapid iteration of the DeFi world also puts forward higher requirements for stablecoin projects. Although it is called “stable”, in order to meet more usage scenarios, the stablecoin track has also ushered in multiple rounds. Innovation, and many solutions have their own characteristics:
- The anchored legal currency stable currency represented by USDT appeared the earliest and currently has the largest market share, but it is a centralized issuer and acceptance of supervision as a sacrifice in exchange for its own credit guarantee;
- Although asset-backed stablecoins represented by DAI have achieved decentralization to a certain extent, they cannot avoid the subsequent over-collateralization and possible debt liquidation problems under extreme market conditions (see 3.12) ；
- Although the algorithmic stablecoins in the recent fires only establish a monetary system through market supply and demand, and achieve “decentralization” to the greatest extent, their “spiral deflation and inflation” are too volatile, and their distribution mechanism has been criticized. It seems that real stability has not yet been achieved, and it is more like a gambling game based on call options.
In view of this, the Fei Protocol, a decentralized stablecoin protocol, announced that it will be launched in the form of decentralized autonomy (DAO) in the first quarter to achieve a stablecoin design with scalability, high liquidity, fairness, and low volatility. To solve the volatility and reward concentration problems of algorithmic stablecoins and the over-collateralization and scalability problems of mortgage stablecoins.
What is Fei Protocol?
Fei Protocol supports the creation of a decentralized, scalable and fair stablecoin based on Ethereum. Its name is inspired by the famous stone currency (FEI) on Yap Island-hope that FEI will show the same stability as stone currency Sex, simplicity and universality.
FEI adopts a new stable realization mechanism of “direct incentives”, which is more capital efficient, fair in distribution, and completely decentralized. The agreement uses the value of assets controlled by the agreement (PCV, new concept, detailed below). Maintain the liquidity of the secondary market and realize the linked issuance and value stability of FEI.
How does Fei Protocol work?
The supply of FEI is determined according to user needs and there is no upper limit. It will enter circulation in the form of sales according to the joint curve.
The joint curve is constantly approaching and finally fixed at $1, so when FEI has new demand, users can obtain it by combining the joint curve purchase, and the initial price is less than $1 to reward users who buy FEI early.
Fei Protocol will support the creation of any joint curve in ERC20 in the future. This release will temporarily contain only one curve priced in ETH, but there is one thing to note:
Fei Protocol’s vision is to create a fully decentralized stablecoin solution. Therefore, tokens issued by trusted third parties (such as USDC, USDT, WBTC) cannot be used as collateral on the joint curve (this is clearly different from DAI). At the same time, in this ETH-denominated joint curve release process, in order to ensure a fair start, Fei Protocol will include a two to three-day “creation period”. Early participants can put their ETH in the pool (early adopters can The group will be called the Genesis Group, as mentioned later there will be TRIBE token incentives).
Specifically, the ETH joint curve will be in the “bootstrap” stage before the price continues to approach and is finally fixed at $1-FEI supply scale is 250 million pieces to meet the integration needs with other DeFi protocols.
After the “bootstrap” phase, the joint curve price will be fixed in a manageable buffer zone and an upper limit will be set. Arbitrageurs can buy on the joint curve and sell on the secondary market, while users cannot sell FEI on the joint curve.
On the contrary, Fei Protocol will save the received ETH as a protocol-controlled asset value (PCV). Fei Protocol deploys PCV to create a liquid secondary market in which users can sell FEI as ETH.
Brand-new stability mechanism design-protocol controlled asset value (PCV)
Unlike TVL (Total Vaule Locked), which DeFi players are most familiar with, Fei Protocol has designed PCV (Protocol Controlled Value) as the underlying design of FEI’s stability mechanism.
Because from Fei Protocol’s point of view, the mechanism design of the traditional DeFi protocol is IOU (I OWE YOU), that is, after the user deposits assets, it is equivalent to a white bar with the DeFi protocol. Not only can they obtain the corresponding DeFi token distribution reward, but also The user can withdraw the deposited assets at any time.
Although this is a feasible scale growth plan-it did bring about a surge in TVL, but it also caused the paradox of speculative capital: when there is a generous liquidity incentive, the asset scale (TVL) of the DeFi platform will indeed expand rapidly However, this is unsustainable because the funds themselves are not “locked in” in the true sense. Once new high-yield opportunities arise, or the incentives of the original agreement cannot be maintained after a certain TVL scale, the funds will quickly and flexibly Transfer.
Therefore, Fei Protocol designed a protocol-controlled asset value (PCV) model to solve these problems. It is actually a subset of the TVL concept, and essentially refers to the assets directly owned by the DeFi protocol that are completely “locked” in the DeFi protocol. From Fei Protocol’s point of view, PCV will make the DeFi protocol more flexible, be able to engage in non-profit activities, and be consistent with the long-term goals of the project.
To put it simply, TVL is controlled by the user, so that a certain profit must be guaranteed-otherwise the user will directly withdraw his own assets for profit considerations, such as AAVE, MakerDAO, Compound, etc.; while PCV is determined by the agreement Controlling the value of the corresponding assets provides more flexibility for the DeFi agreement, allowing it to engage in some non-profit activities, such as managing the treasury, insurance funds, ensuring liquidity or providing price support for DeFi users, etc.
In short, unlike the IOU under TVL, PCV Chinese users cannot withdraw their deposited assets at any time. Of course, the governance tokens in PCV can accumulate deeper value capture and assume corresponding responsibilities.
Fei Protocol is an ideal application for PCV. The joint curve and other incentives provide funds for the PCV pool, which is approximately equal to the FEI’s entire user circulation. It will allocate 100% of the PCV funded by the ETH joint curve to the Uniswap pool with ETH/FEI (the PCV will not be redistributed in the future To other platforms).
Uniswap owns the FEI required for this liquidity and is paired with each FEI purchased by the user on the joint curve. Therefore, the depth of the market’s liquidity should be equal to the total amount of remaining circulating FEI. Compared with relying on the stability mechanism provided by external liquidity, this method has two key advantages:
- Guaranteed liquidity-FEI holders can rest assured, because no whale can drain the liquidity owned by the agreement. It is supported by the joint curve and placed in the Uniswap ETH/FEI pair;
- Anchoring adjustment-If the price is at a “discount” for a long time, Fei Protocol can re-anchored adjustment through Uniswap. It achieves this by executing the following atomic transactions:
- Withdraw all liquidity owned by the agreement;
- Buy FEI with the withdrawn ETH to make the price rise to the anchor target.
- Supply the remaining PCV as liquidity;
- Destroy excess FEI. When the price is low for a certain period of time, any guardian can trigger the peg to re-weight. The agreement uses FEI mint to reward the guardian.
At the same time, with the help of governance mechanisms, PCV’s future use scenarios can be more imaginative: the balance of collateral can be maintained in lending platforms such as AAVE, market interest rates can be adjusted by providing and borrowing FEI tokens, and even these governance agents can be used. Coins contribute to the governance process of the entire ecosystem.
How to design Fei Protocol’s “direct incentive” mechanism?
FEI adopts a new stability realization mechanism of “direct incentives”: Direct incentives refer to incentives for stablecoin trading activities and behaviors that encourage the use of stablecoins. Rewards and penalties push prices toward anchored targets. Usually this will include at least one incentive exchange as a hub, and all other exchanges and secondary markets can use incentive exchanges for arbitrage, which helps stablecoins maintain a peg in the entire ecosystem.
Fei Protocol promotes the achievement of the anchor target (1 U.S. dollar, the same below) through direct price rewards and punishments to both mint and burn under the premise of combining currency prices. This setting is very intuitive for users and is proportional to the anchored price distance-as shown in the figure below, selling FEI tokens at a discount will result in greater losses, on the contrary buying Will provide direct income, Fei Protocol is using this method to promote price stability near the anchor target.
And if there is a significant price premium, then the joint curve can also be used to profit, and this will naturally make the currency price on the side above the anchor target also have the momentum to return to the anchor price.
That is to say, the direct incentives of the Fei agreement only affect users who actively participate in the incentive behavior. If the FEI sales pressure is great, the seller has to bear the corresponding deflationary costs, and if there is no trader to restore the price, the holder can rest assured Use the agreement that supports the price, because the long-term support capacity is supported by deflation, these new features lead to the anchor of FEI basically maintained in real time driven by arbitrage.
What is TRIBE token?
Fei Protocol will be launched as a fully decentralized DAO from the very beginning, and TRIBE token is the governance certificate of DAO. TRIBE holders can vote on the following governance proposals:
- Add a joint curve for new tokens or adjust the price function of an existing joint curve
- Adjust the allocation of PVC to accommodate new funds or existing PCV
Fei Protocol’s DAO follows the principle of governance minimization, does not actively seek any active intervention in governance, and uses more autonomous and algorithmic mechanisms to avoid rigidity and excessive reliance on governance.
And Fei Protocol will also allocate part of the TRIBE tokens to the FEI staking pool. Users can deposit FEI and distribute TRIBE proportionally. The development team and investors retain the other part. The team will also discuss the allocation of a percentage between the Genesis Group and the initial DeFi product, and the remaining TRIBE will be kept in the treasury controlled by the DAO.
TRIBE rewards from Genesis Group
The members of Genesis Group get TRIBE share in the initial joint curve transaction similar to Hegic IBCO, which will open the earliest FEI sales on the joint curve to everyone with equal opportunities, and as an additional reward, Genesis Group earns 10% of the total supply of TRIBE.
The completion of Genesis Group will initiate the initial sale of TRIBE tokens. FEI and TRIBE will be issued simultaneously on Uniswap. The fully diluted valuation of TRIBE will be set to the same value as the amount of ETH raised by Genesis Group. And the tokens will be stored in the development fund, which will be linearly unlocked within four years to ensure sufficient liquidity.
What kind of turbulence can the “new” mechanism design to the flying Fei Protocol bring to the stablecoin market? let us wait and see.
