FIP 4: Reinstate / Remove Direct Incentives

Over the past few weeks there has been active discussion about long term viability of direct incentives. The purpose of this thread is to gather these discussions in one place and to decide whether it makes sense for direct incentives to be reinstated or removed.

Pros:

  • Deflation for peg maintenance: Direct incentives provide an additional mechanism beyond reweights to maintain the peg of FEI to $1. The burn penalty removes FEI from circulation, which helps reduce the supply to support the price.
  • Unique Differentiator: Direct incentives are a novel feature that differentiate FEI from other stablecoins. Being unique is not necessarily a positive. However, it can generate additional interest from new users researching the protocol, and it can create new niches that cannot be filled by other stablecoins.

Cons:

  • Undermines the purpose of a stablecoin: Nearly all use-cases for stablecoins are based on the coin maintaining its worth at a pegged value. In particular, it is desirable for stablecoins to be redeemable at the pegged value in a highly liquid manner. Direct incentives break this model. It’s easy to imagine users dismissing FEI for other stablecoins that have no threat of penalized redemption.

  • Inconsistent user experience: To perform FEI swaps on uniswap routing through the FEI-ETH pair, users must increase slippage on their trades. New users might not know they need to do this. They might wonder why their trades fail, and they might also wonder why the amount of FEI swapped is different from their expectations. Even for experienced users, the optimal slippage rate might be difficult to determine, and this information cannot be integrated into the uniswap user interface.

  • Isolated to Primary Exchange:
    Direct incentives only work on the UniswapV2 FEI-ETH pair. To onboard a new exchange, we would have to write new code specific to that AMM. Many new AMM designs would not support direct incentives because of complex or nondeterministic curves.

  • Breaks composability with other protocols: Direct incentives break standard ERC20 behavior and compromise integration into other protocols. Some price oracles cannot properly report the price of FEI. Aggregators such as Coingecko post a large warning about FEI that could be a deterrent for new users researching the protocol.

In Restoring the Peg Mechanism we explored the possibility of restoring a reduced version of direct incentives without a mint reward and with a capped burn to act more as a fee on selling. A logical burn cap would be small, likely <1%. Large potential penalties create uncertainty for FEI holders which we would want to minimize. There is natural tension between disincentivizing selling and inspiring confidence in FEI holders. The smaller the burn penalty, the more the question should be asked of whether direct incentives are necessary at all.

Given the above costs relative to the marginal benefit of reintroducing direct incentives, the team is leaning toward removal of direct incentives as the forward looking strategy. FEI holders can be confident in a highly liquid stablecoin without the worry of incurring a penalty for selling. This would allow us to move forward with the bonding curve and reweights as the primary peg maintenance mechanisms, and focus on building out the FEI ecosystem through PCV deployment.

We would like to hear more from the community about direct incentives, any additional considerations we should include in this discussion, and whether you agree with the current assessment.

5 Likes

I think direct incentives are too much of an obstacle for successful integrations. I think being compatible with other protocols should be a priority.

3 Likes

Bonding curve and reweights helped Fei maintain the peg during one of the most chaotic period for cryptos. DI’s create apparently multiple prices for a supposedly “stable” coin . So I am favor of bonding and reweights ( to be fine tuned) plus sustainable, decentralised and diversified PCV. Integration will come in parallel.
Tribe will fluctuate as a function of PCV and success of use cases.
Although it is not todays discussions , FEI should not issue bonds :slight_smile: :wink:

One thing that will help new users for FEI and Tribe is detailed and easy to understand data about realtime tribe in circulation and volume .
Good luck to all tribe holders.

1 Like

Simplicity is key. Simple products spread easier as people do not have to invest much energy to understand how they work. Simple to use and understand. This could be a goal for FEI.

Direct incentives adds much complexity without provable benefits. Actually, it brings all the drawbacks outlined in the post. I would add that they take out trading volume from ETH-FEI pool and push it to other pools that do not have penalty as the others are more transparent about the selling price.

I agree that direct incentives are not necessary anymore. The peg can be sustained by reweight, FEI floor, bonding curves and a diversified PCV. A plus would be influencing FEI interest rates in lending market (FEI Bonds) and driving integrations to grow FEI demand.

7 Likes