I love the level of thought and detail put into this analysis and the overall commitment to the goals of FEI stability, liquidity, and growth in the Fei DAO. It is great that the community is putting together this document to have discussions and seek consensus around PCV management strategies. This is a good jumping off point for a broad discussion about what PCV is for and what it is not.
The first thing to consider is that there are inflows and outflows to the PCV that don’t occur in normal portfolios. FEI can be minted and purchased from the bonding curve when demand rises, growing the PCV through an external source. Likewise FEI can be burned and sold in the reserve stabilizer or reweights when demand falls. This to me is a primary metric and component of PCV composition that does not have a direct comparison to a portfolio.
Another consideration is that the primary purpose of the PCV is to support the function of FEI. Investments, although important, are secondary to maintaining the peg and ensuring adequate liquidity is available on the market. You do highlight this in the document, but the overall language and framing does not really capture this sentiment. Take the title of the document as an “Investment Policy Statement”, perhaps “PCV Deployment Guidelines” better captures our goals. Even using frameworks like mean variance analysis and comparing to benchmarks does not quite feel appropriate. PCV is not really a portfolio in the traditional sense, and the language and analysis in the doc should reflect that.
I do think we should be issuing reports on PCV composition, inflows and outflows. Having target percentages of various asset classes also makes sense. In my opinion, the deployments should be productive or tactical in nature such as:
- providing liquidity
- performing metagovernance on other platforms
- Brand/vision alignment
- Earning yield to grow PCV
The broader category breakdowns can be motivated by some level of diversification and risk management as well.
There is another important category of risk that you allude to multiple times in this doc which I think needs to be discussed in more detail: integration and security risk. As recent hacks in DeFi have shown us, the composability of DeFi comes with serious security implications. Given the nature of PCV, Fei Protocol needs to consider this risk with at least the same level of priority as the actual performance of the assets that have PCV allocated to them. Any strategy for PCV management needs to be heavily influenced by the security and decentralization models of the target assets/investments as well as the specific implications for Fei Protocol if things were to go south.
I would love to flesh out deployment sizing relative to overall risk thresholds in more detail as this would be a great framework to invite other teams to work with us on integrations. In general, its important to slowly ramp up liquidity and volume on new contracts and integrations. For example we might put a substantial portion of the PCV in a well established contract like Aave but not as much in newer protocols which aren’t as battle tested.
How does everyone feel about the framing that PCV is not an investment and that FEI supply and demand are key pieces of the puzzle?