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.
Advantages:
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
Disadvantages:
Could leave FEI more sensitive to stale oracle attacks
As a side note about technical implementation, the ReserveStabilizer contract (EthReserveStabilizer | Address 0xa08A721dFB595753FFf335636674D76C455B275C | Etherscan) 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.
To get an idea of how often this stabilizer might end up being used, we can look at the price of FEI over time. We would expect redemptions to occur whenever the price falls below the redemption floor (0.95 or 0.99).
Here is a visualization of the FEI price according to the FEI_USD and FEI_USD oracles. The FEI_USD Chainlink oracle has only been out for about 3 weeks but you can still see some broad trends. The FEI_ETH oracle is much more volatile, and it drops below 0.99 more than once a day on average. On the other hand the FEI_USD oracle does not come near the 0.99 level. We can assume the FEI_USD is more accurate given that the accuracy thresholds for FEI_USD, FEI_ETH, and ETH_USD are supposed to be 1%, 2%, and 0.5% respectively, and also because FEI_ETH must be multiplied by the ETH_USD oracle, further compounding the noise.
Maintaining the peg is one of the most important things for a stablecoin to do. Based on this data it does not seem like the stabilizer will be invoked very regularly. But even if it were, this is an important part of the protocol’s job maintaining the peg.
For all of the above reasons I think that raising the stabilizer is a necessary step in the evolution of Fei.
Wonderful idea, it has been discussed before on the Discord, and I will support, but I think we should wait to pass this on-chain.
Currently, there are no automatic mechanisms to inflate TRIBE to support PCV in case of CR < 100%, neither is there a way to redeem FEI at .85$ if CR is 85%, or anything similar that could prevent draining 100% of the PCV.
I know it’s extremely unlikely that it becomes a problem (currently 125M FEI circulating not owned by Fei Labs for 750M$ PCV), but do we want to play this game ?
I feel that the 5% “punishment” for selling out of market would help prevent bank run if there is a severe ETH crash, and that reducing it to 1% would not have the same effect. But maybe not.
I like the idea as it gives more confidence to the peg.
Just wondering how it can be capital efficient while defending the peg. By the other proposal that was being discussed in Discord, there was the idea to use a relevant part of the ETH in a productive way, supplying to Compound/Aave. The withdraw of ETH from Compound/Aave would be automatic to send more to the stabilizer if needed? Maybe it would not be the best option.
I think this talks with @Eswak concerns. If we have a limited amount of capital directed to the stabilizer it would minimize the risk in this extreme scenarios.
I fully agree that in the long run there should be some sort of parameterized dynamic fee mechanism that adjusts the fee depending on CR health.
I think we can wait on that part of the system though because 1) CR is very far from the danger zone right now 2) not all PCV is currently hooked up to the redeemer, only the ETH in the dripper 3) having a tight spread on redemption will help the protocol grow in the short term by increasing user confidence
I am in favor of raising the redemption to $0.99. I agree with @Eswak concerns but think the benefits of increasing user confidence outweigh the risks. As @Storm suggests, a parameterized dynamic fee should be considered sooner rather than later.
