Bots profit from FEI sellers, bots do not profit from the PCV

1

I see a lot of misinformation stating that reweights enable bots to drain the PCV. That is not true. Here’s why:

  • The PCV always buys FEI below 1.00, and sells FEI at 1.01 (through the bonding curve).
  • The PCV accrues ETH when apes panic exit.
  • The PCV spends ETH during a reweight, but the amount spent is less than the amount accrued from apes selling FEI below peg.
  • This all assumes ETH price does not change. Which is why it is important for reweights to happen soon and often.

You may ask “if arb bots are making money, who’s losing money?”. The answer is FEI sellers who sell below peg. They are the one paying the exit tax, and arb bots are capturing some of it alongside the PCV as it brings the peg back up.

To re-state things – when people sell FEI below peg, the PCV shrinks as it is supposed to, BUT the collateralization ratio goes up because it made a profit buying up FEI below peg when it was originally issued above peg.

Sure, the profit the PCV makes could have been higher if there were no bots, but the only people losing are the FEI sellers below peg.

The reweight mechanism is actually sound. It’s just not responsive enough to the huge discrepancy between real FEI demand and how much FEI there actually is on the market.

The PCV will shrink, but the collat ratio will be higher after reweights.

4 Likes
2

I agree with you. I think many investors and even team members ignored this.
Yes, it is really not a bad idea to allow the arb bots to destroy FEI with a price < 1 dollar.
In fact, if there is any arbitrage space, the bots are willing to purchase at any price lower than the price they can exit. As a consequence, the price will go up and gradually converges to 1.

And more importantly. the total PCV spent should be much less than undo proposal… Bots are saving PCV if compared to the undo proposal.

I think this post should be read by more people.

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3

That’s true, and an even better way to see it.

Normal reweights will cost the PCV less than the $1 redeem and the undo button…

4

Normal reweights will cost the PCV less than the $1 redeem and the undo button…

5

We should let more people read this insight. I believe it is true…
If it is true, the team can directly deploy the reweight with higher frequency …
Then all of the problems can be solved…

6

most people won’t be able to exchange their FEI at $1 with reweight. for undo button, everyone get a fair chance to do so.

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I don’t think this is true if there is a buying incentive. The bonus paid out is redeemed at the peg.