Begin “Contractionary Monetary Policy” for Fei Protocol with some FEI policy changes to bolster the FEI peg and protect PCV.
Motivation:
The recent ETH downturn has placed the protocol under stress. While the FEI peg remains stable, the majority of the protocol’s DAI reserves were used on stabilization. This peg pressure comes from both exogenous and endogenous demand drivers:
Arbitrage with secondary FEI liquidity, particularly FEI-ETH on UniV2
FEI redemptions by external FEI holders
All protocol-owned FEI increases the “leverage” of the protocol by expanding circulating FEI through lending markets or AMM liquidity. By reducing these deposits, the protocol can contract supply and drive FEI demand to return to a greater than or equal to $1 peg rather than slightly below as in the current state.
Proposal:
Moratorium on FEI minting and deployments from either the DAO or Optimistic Approval - only automated FEI minting for peg defense should be allowed until explicitly authorized by TRIBE holders to end the moratorium
Authorize the Security Guardian to:
withdraw FEI incrementally from both volatile LP positions: FEI-ETH and FEI-DPI using PCV Guardian contract and sending assets to the DAO Timelock to await future DAO deployment. For FEI-ETH, withdrawal size will be constrained by oracle safety margins of Chainlink.
withdraw FEI incrementally from Curve d3 pool using PCV guardian each time FEI falls below 1:1 relative to FRAX and alUSD
withdraw FEI incrementally from Aave each time utilization falls below 90% back up to at most 90% utilization
enable and refill PSMs as needed to defend peg using PCV Guardian contract
Begin further community discussions on additional actions to take to defend the peg and PCV
Note that the Security Guardian is already authorized to act in extreme market conditions such as this per FIP-55, but this proposal serves as an explicit description of actions to be taken.
Voting Rules:
Voting will be a binary, binding vote over 24 hours. The shortened time window is used due to the extreme market conditions. If the proposal is passing but not yet finalized, the Security Guardian may begin taking action if market conditions worsen. If passed, this will be enacted by the Security Guardian. Quorum is 10M TRIBE.
Can anyone please explain what “oracle safety margin of Chainlink” means?
Also, how can withdrawal of FEI-ETH and FEI-DPI LPs help stablize FEI? My understanding is that less liquidity in the trading pairs will harm FEI’s redeem-ability. Think of FEI-ETH LP as a way to redeem ETH using FEI. Say, If LUSD cannot be used to redeem ETH, LUSD will lose the peg. Also, in a bear market, people are more likely to swap ETH for stable coins such as FEI, which will increase the demand for FEI
I have no questions about the other 2 ways to reduce FEI supply on the market
Review makeup of PCV and divest/shift assets to stables if required.
However I believe there may be potential to retain some powers of the Fuse Charter as pool #8 is now our primary lending/borrowing asset pool. With a downturn there may be increased activity here.
“oracle safety margin of Chainlink” essentially means we are coordinating with Chainlink to ensure a safe amount of liquidity is removed.
The withdrawl of liquidity is not to directly increase the stability of the peg but rather the cost of maintaining it. With less Fei-ETH LP there will be less PCV losses if the price of ETH were to continue to decline.
The actions being taken are largely about increasing demand for Fei in the short term and reducing the costs associated with maintaining the peg.
Summary: Peg is trading near redemption floor of $.9975, contractionary policy aimed at reducing circulating FEI and increasing demand should restor to $1.
Stableswap liquidity pools:
FEI-USDC 1bps - 10M FEI out of range 0 volume. ± 5bps on USDC peg Uniswap Info
FEI-USDC 5bps - 24M FEI @ .9984-.9964. Uniswap Info
Remove 2/3 ETH-FEI LP, half to refill Eth PSM and half to DAO Timelock
Unpause LUSD PSM for redemptions and switch ETH PSM to redemption side - net effect is any of DAI, LUSD, ETH can be redeemed but only DAI can be used to mint new FEI
Remove 25M FEI from Aave
Remove DPI-FEI liquidity from Sushi to DAO Timelock
I agree we should at minimum lower buyback APR to 2-5% if not pause completely
We will move forward with removing the Kashi liquidity per an earlier FIP-50 Snapshot
I propose continuing to remove all eligible protocol FEI deposits possible as a first step, and evaluating further PCV composition changes after that.
I am in support of withdrawing Fei from all locations that the protocol has deployed it, to restore the peg. I applaud Joey and the rest of the contributors that have been focused on studying the PCV, its composition and its effect on the price of Fei. Contractionary policy LGTM.
I don’t love the idea of pulling a bunch of FEI out of all the Fuse pools unilaterally. It makes sense from a risk perspective, but if we want other protocols to increasingly lean into having FEI as a major borrowable USD-denominated asset in their Fuse pools, it’s not great to have them feel like it could get pulled in moments of stress. To be clear, I’m very much in favor of revisiting some of the Fuse pools into which FEI has been deployed, I just don’t think the dollar value at risk is high enough that we should just unilaterally jack up utilization rates across the board by withdrawing liquidity. All the other parts of this seem fine.
@delitzer I have to agree with you. There is also an optics component that we shouldn’t impulsively remove liquidity at will, or at the very least provide some notice period that we’re about to do so.
@Fishy has made an amendment on snapshot to specifically exclude pool #8 (FeiRari) from adjustments. I voted to support consolidating Rari FEI positions into this pool while conducting reviews (OA, looking at you guys) and reporting on which other Rari pools should we remove FEI liquidity from.