FEI's future as a decentralized central bank

Pursuant to a few high quality discussions i’ve seen and participated in; I would like to voice a contrarian opinion: the PCV should not be invested at all.

There has been debate on whether FEI should act as an insurance company and invest the “float” to generate revenue for shareholders, but the far superior and ambitious model would be that of a central bank.

As outlined in the white paper, eventually the protocol should be able to support a 1:1 peg of FEI at less than 100% collateral. In the future, the protocol can develop measures that will issue FEI well above the dollar value of the PCV and be invested or lent out for revenue, yet held separately on the balance sheet.

The sole objective of the PCV is there to support the peg, and to build as solid of a consensus as possible for the perpetual maintenance of that peg. With those objectives in mind, the PCV needs to be as liquid and high quality as possible.

Nothing is as “lucrative” as issuing additional fei beyond the dollar value of the PCV; the greatest investment itself, will be to over issue FEI while under 100% collateral rate, with the PCV deployed actively to maintain the peg rate. Therefore with this line of thinking, the PCV should only ever move into more liquid and less volatile classes of asset:

Consider a situation where ETH loses 80% of its value in a month or less; if the PCV is invested in any sort of liquidity farming protocol, given the general deleveraging, it would be very difficult to quickly deploy those assets to defend the peg when it’s most needed. As the bonding curve target price quickly tanks, no amount of speculative buying can bring it back; only rapid deployment of PCV in the form of repeated reweights can guarantee both the value and liquidity of FEI. To ensure quick restoration of the peg in future bear market situations, most ideally assets with less implied volatility than ETH, or uncorrelated to ETH should be brought into the bonding curve.

Currently, buying and holding FEI-TRIBE is functionally buying CALL options on ETH with a low delta, hedged gamma, and negative theta. The stability of the coin and health of the collateral ratio is entirely at the mercy of rising ETH prices. Should ETH prices have plunged through the course of FIP-2, FEI could very well have been defunct by now already. Therefore PCV should not diversify into lower quality assets. (and LP staking pools or farming aggregators are decidedly lower quality assets) The best way to ensure PCV capital is well utilized, would be to simply to issue more FEI.

Such assets can potentially include: (in order of likely implementation)

  1. A Basket of other stablecoins, most importantly ones that aren’t backed by ETH. In the short run this is the easily way to gain hedge against ETH exposure, though in the long run to preserve the integrity and decentralization of FEI, these should be ultimately phased out. USDT, (must be phased out sooner rather than later due to the centralized nature of tether corp), USDC, BUSD, TrueUSD, PAX can be included in the basket. While DAI, LUSD and other stablecoins that uses ETH in its reserve should be explicitly excluded.

  2. BTC compatible with ETH mainnet, though ideally not WBTC but a truly decentralized format such as TBTC. BTC’s realized volatility has been steadily decreasing over the years. At some point in the future it could become meaningfully uncorrelated with the movement of ETH. Also it is undoubtedly the beacon of decentralized asset, and holdings can be easily verified independently.

  3. Gold, processed externally for blockchain holding, (FEI labs should not store gold in its vaults, that goes against the spirit of defi and is very costly) because it is one such asset which has no correlation with any cryptos at all. Also it has demonstrated the lowest volatility of all major asset classes, and in many way it is the oldest and most recognized and ancient decentralized asset.

Imagine a future situation, where circulating FEI is 300% or even more of the PCV, and the peg rate is firmly maintained. No one will question the full convertibility and stable value of FEI, because like reputable central banks around the world, users will believe that the PCV can preserve through any possible market fluctuations and defend the peg in perpetuity.

The PCV will eventually become the reservoir of tier 1 capital, and a substantial liquidity test can be applied to determine the exact safe limit of circulating FEI. My hope is that one day FEI can reach the BASEL III limits of 12.9% collateral Ratio. The PCV merely sitting dormant doesn’t mean it is wasted at all, because every cent can be instantly deployed to ensure liquidity and price parity, and their presence alone inspire confidence in users.

The issued FEI, which is unchained to collateral assets and potentially protocol owned, can be used to generate profits by being lent out to various lending platforms, or used in automated UNI v3 strategies, or provide liquidity to other nascent tokens; sky’s the limit!

you don’t need to invest with the PCV at all; FEI itself is in the most lucrative business possible: printing money.