This post kicks off the discussions around Fei V2 mechanisms! We think it is powerful to involve the Tribe as early as possible in the development. Of course, for the V2 mechanisms to be deployed, they must be approved through governance.
The core principles of V2 are:
- Enhancing PCV Management Capabilities
- Tightening the relationship between FEI and TRIBE
- Backward compatibility with V1
- Simple risk-minimized design
V2 will be rolled out in multiple phases to minimize risk of introducing too many new mechanisms at once and accommodate development and audit timelines. We see Fei as a continual evolution rather than a sequence of discrete versions. For example, the reserve stabilizer was added and direct incentives were removed already by TRIBE holders. That being said, the V2 branding helps solidify and clarify this suite of particular changes.
In Fei V1, TRIBE is implicitly the backstop of the protocol, and not directly tied to the success of FEI or PCV management. V2 aims to directly link TRIBE to PCV performance through TRIBE buybacks and inflation.
V2 would add a mechanism where TRIBE gets minted and sold for FEI as soon as the collateralization ratio dips below 100% or some configurable threshold by governance. The mechanism would be similar to normal reserve stabilizers that sell PCV for FEI when the FEI price dips below a certain threshold, but with an additional check on the collateralization ratio.
TRIBE would earn a percentage of the PCV equity (PCV value - user circulating FEI) each year via buybacks, as compensation for bearing the risk of inflation in the event of undercollateralization. FEI would be minted to buy TRIBE off of the most liquid AMM (currently the FEI-TRIBE Uniswap V2 LP pool) and distribute back via staking rewards. A portion of this TRIBE would go back to the DAO treasury, which could be used to pay for development, liquidity incentives, or as a buffer against inflation.
The rationale behind using PCV equity is that TRIBE should only receive rewards for being overcollateralized, thus in turn incentivizing risk management and a longer time horizon. This feature would require a manipulation resistant collateralization ratio oracle on-chain which @eswak has been working on.
Likewise only distributing a percentage as opposed to 100% of the equity will maintain a healthy PCV buffer to absorb volatility without inflating TRIBE.
For example, if the PCV equity is 500m and the distribution rate is 5%, then 25m FEI would be minted over the course of the year to buy TRIBE and distribute back to stakers.
Open design questions: governance changes with any new staking derivative, potentially boosting for lockups (veTRIBE?)
One of the most important aspects of Fei Protocol is the management of PCV. This PCV is the reserve used to both back the value of FEI and also provide utility for it through liquidity provision and other integrations.
V2 will continue to benefit from a variety of PCV deployments throughout DeFi. A prominent addition to PCV will be BalancerV2 investment pools. These will be able to:
- provide liquidity simultaneously to multiple tokens
- Automatically rebalance to preferred asset allocation (and earn fees in the process)
- gain capital efficiency by rehypothecating tokens through the Asset Manager
- potentially earn BAL rewards
Likewise there will be some BalancerV2 Stable pools optimized for FEI stablecoin liquidity, which benefit from the gas optimized Balancer V2 architecture and composability with the investment pool.
The Fei DAO would be completely in charge of the tokens and asset allocations between them, leaving the pools unfinalized. This means the parameters such as trading fee and weights can be changed by the DAO.
By introducing the explicit relationship of TRIBE absorbing PCV volatility, TRIBE becomes effectively levered on PCV depending on how much FEI there is in circulation. To take some extreme examples, if there are no circulating FEI then TRIBE would simply earn rewards from the entire PCV in perpetuity. If there was exactly as much user FEI in circulation as PCV, then TRIBE has no rewards and small movements in PCV have a large impact on PCV equity.
We will add in automatic adjustments to PCV composition based on the effective leverage factor. For example if leverage is high PCV can switch more into stable assets by increasing the weights of stable assets in the Balancer pools.
This treats the PCV like one giant MakerDAO vault, where TRIBE holders control the algorithmic knobs that rebalance PCV based on market conditions.