FEI is a stablecoin. Two of the most important features of a stablecoin are 1) stability to its peg 2) user trust that this peg will always be maintained.
The primary mechanism that FEI uses to maintain its $1.00 peg are reweights. When FEI is trading at less than $0.995 on the FEI-ETH pair on Uniswap V2, the protocol will “reweight” the price by buying enough FEI to bring the price up to $1.00. This process currently occurs as often as every 4 hours.
Fei has an additional peg maintenance mechanism that is much less frequently used, the reserve stabilizer backstop. This mechanism allows each unit of FEI to be redeemed for $0.95 of ETH. This mechanism was implemented in FIP-2.
Since the protocol is continually growing stronger, it is time to consider raising this backstop from $0.95 to $0.99, much closer to the peg value of $1.00. This would give a strong signal to potential users that the protocol is able to maintain its peg.
- Increased confidence in FEI by current FEI users, prospective FEI users, and users of integrating protocols
- Every FEI redeemed through the reserve stabilizer still earns the protocol a fee, because the redemption value is lower than the face value of $1.00
- Could leave FEI more sensitive to stale oracle attacks
As a side note about technical implementation, the ReserveStabilizer contract (EthReserveStabilizer | 0xa08A721dFB595753FFf335636674D76C455B275C) that handles the redemptions normally holds about 10k ETH. It is periodically filled up when it falls below 5000k ETH at most once per hour. This prevents a large portion of PCV being redeemed in a short period of time, but would still allow large volumes of redemption over a timescale of days.