Fei Peg Policy Changes

Summary:

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.

The proposal is live on snapshot here: Snapshot

2 Likes

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

I would also like to propose the following:

  1. Pause on TRIBE buybacks
  2. 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.

1 Like

“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.

2 Likes

Protocol data summary Jan 22, 9:00pm PT:

Peg State of Affairs

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:

Protocol FEI State of Affairs

  • 6.2M FEI in SushiSwap DPI
  • 51M FEI in Aave
  • 13-50M in Curve (depending on how you count)
  • 40M in EthPCVDeposit
  • 84M in Other - NamedStaticPCVDepositWrapper | 0x06dAcca04e201AD31393754E68dA04Dc14778Fa6
    • 500k in Idle Senior
    • 2M in Visor
    • 500k barnbridge Senior
    • 2.5M Idle best yield
    • Kashi DPI-FEI 1M
    • Kashi Sushi-FEI 2.5M
    • Kashi Tribe-FEI 2.5M
    • Kashi WETH-FEI
    • 50M Laas
    • 20M in PSMs
  • 32M in Fuse
  • Buybacks at 20% of equity APR

User FEI State of Affairs

340M

  • 107M FEI-3Crv
  • 30M d3
  • 50M UniV3
  • 110M FEI-TRIBE LP
  • ~50M Aave + Fuse (hard to differentiate protocol from user due to re-circulation)
  • 10M in Angle

PCV ETH State of Affairs

10000 tWETH - EthTokemakPCVDeposit | 0x0961d2a545e0c1201B313d14C57023682a546b9D

16000 UniV2 WETH - Uniswap V2: FEI 3 | 0x94B0A3d511b6EcDb17eBF877278Ab030acb0A878

70000 aWETH - AavePCVDeposit | 0x5B86887e171bAE0C2C826e87E34Df8D558C079B9

16000 ETH in compound EthCompoundPCVDeposit | 0x4fCB1435fD42CE7ce7Af3cB2e98289F79d2962b3

49000 Lido EthLidoPCVDeposit | 0xac38ee05c0204a1e119c625d0a560d6731478880

2500 Pool 146 - EthCompoundPCVDeposit | 0xC68412B72e68c30D4E6c0854b439CBBe957146e4

13000 ETH PSM - EthPegStabilityModule | 0x98E5F5706897074a4664DD3a32eB80242d6E694B

15000 FEI DAO Timelock FeiDAOTimelock | 0xd51dbA7a94e1adEa403553A8235C302cEbF41a3c

Guardian Actions Taken

  • 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.

5 Likes

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.

1 Like

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.

3 Likes

@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.

2 Likes

I see your point. There is kind of a multilayered logic to this move:

  1. There have recently been multiple pools subject to UniV3 oracle manipulation and other operator risk, which we’d want to avoid
  2. Much of this FEI is already unutilized, so we are simply targeting a utilization ratio that is meaningful
  3. This is a move away from unbacked issuance and towards our turbo product which is stickier and better for both parties
2 Likes