Earlier this Saturday, FEI Protocol held its Genesis occasion, efficiently elevating over 639,000 Ether — roughly $1.3 billion — in dedication for its stablecoin. The Ethereum raised for the undertaking might be used as collateral to mint its stablecoins, which makes use of bonding curves to keep up a peg of $1. FEI’s protocol mechanism additionally permits for direct incentives, which is “extra capital environment friendly, has a good distribution, and absolutely decentralized.” Based on the undertaking, over 17,000 addresses participated within the occasion, offering $2.6 billion in liquidity to Uniswap.
— Fei Labs (@feiprotocol) April 3, 2021
Potential Controversy for FEI’s Mechanism?
Nevertheless, the undertaking has already acquired criticism for its mechanisms. FEI’s use of protocol managed worth (PCV) signifies that, when customers deposit collateral, their funds can’t be instantly pulled out. It’s because the capital is owned and managed by the protocol itself — making it extra capital environment friendly and decentralized in comparison with different stablecoins.
The undertaking initially allowed collaborating customers to mint FEI at $0.50 — a seemingly large low cost from the $1 peg. Because the Ethereum bonding curve would develop based mostly on provide, many customers anticipated that the stablecoin would attain its peg as soon as sufficient collateral was deposited.
Nevertheless, liquidity suppliers and short-term traders discovered themselves unable to promote their FEI for ETH with out incurring large losses on the commerce. This was due to the protocol’s direct incentive system which used a dynamic burning system to return the stablecoin’s worth to peg. Based on the protocol’s white paper, promoting “FEI in a fast time-frame throughout a interval of excessive promote stress” would result in the consumer “incur[ring] a major burn penalty.”
Over $1 billion in ETH quickly trapped until FEI holders need to incur penalties.
If you happen to’re holding FEI, you’ll be alright If you happen to’re affected person.
However Solvency ≠ Liquidity https://t.co/xoae1sTE5f
— Ryan Watkins (@RyanWatkins_) April 3, 2021
Via a Twitter publish, Messari analysis analyst Ryan Watkins shared his ideas on the matter: “The problem with FEI proper now could be most individuals need to promote it again for ETH, however doing so incurs excessive penalties. Ultimately, FEI will re-weight to convey [itself] again to its peg, however then what? There’s little actual demand for FEI and most are nonetheless working for the exits.”