Title: PCV Initial Stable Coin Investment
Fei Protocol’s PCV is currently valued at $1,302,587,677 and is heavily exposed to the $ETH price fluctuation. We propose FIP-X as the initial step to be taken towards diversifying the PCV whilst we continue to explore how best to holistically manage the PCV. We are not committing this to be the only stable coin allocation, just the first PCV investment that can be performed immediately without obstructing future plans.
FIP-X proposes to invest $300M into stable coins (~25% of the ETH holding). The management of these stable coins will be addressed in a separate FIP as the community needs to discuss the cost and benefits of each option with more details.
Based on the current Uniswap trading volume, purchasing $300M into stable coins is expected to occur over a 4 weeks period. We propose purchasing equal weights of USDC, DAI & USDT for the following reasons:
- Most liquid non-FEI stable coins within the ethereum ecosystem
- Highly liquid trading pools on Uniswap and SushiSwap
- By investing in three stable coins we can diversify the idiosyncratic risk, especially the regulatory and operational risk
- We can execute a large allocation to stables with less impact on the markets by spreading our purchases across three different stable coins
- These stables are the most used in stable pools such as the Curve Finance 3pool and also in the lending protocols
- In the risk assessment done by lending protocols, USDC/USDT/DAI are considered the less risky stable coins
The PCV currently ~$1.3B comprises 100% of ETH and because of this concentration the PCV tracks the price of ETH closely. The PCV Diversification Tribe will present an investment policy and a risk management strategy to the DAO for discussion. However, it will take time to develop and shall not be rushed as we need to build it with a lot of interaction with the community. As an immediate action, there is a collective thought to diversify into stable coins.
USDC, DAI & USDT are all stable pegged assets with very low volatility. Each token has survived the events of black Thursday (12/03/2020) and is widely supported with deep liquidity within the ethereum ecosystem. USDT no longer has SEC regulatory risk overhang. Maker DAO is committed to maintaining the peg through over collateralised lending ratios and as an actor of last resort by selling MKR on market if required. USDC is backed by Circle and Coinbase. The US dollar reserves for USDC are attested to by top 5 accounting services firms, Grant Thornton LLP, and USDC is used by the likes of Visa. All three stable coins rank highly amongst the most liquid ETH pools on both Uniswap and SushiSwap.
In our view, the three main objectives of PCV management are (i) peg maintenance, (ii) providing liquidity/market-making and (iii) having a sustainable and growing FEI DAO. The stablecoins allocation of $300M represents ~75% of User Circulating FEI and over 520% of the Liquid FEI (user circulating FEI less time locked and staked FEI) at the time of writing. This will immediately help peg maintenance and assist integrate FEI into the DeFi ecosystem. Additionally, it is the first step to be a liquidity provider in a stable coin pool or to lend stable coins on protocols such as Compound and Aave.
Token acquisitions would be done using the PCVSwapper on Uniswap v2 and Sushiswap proposed by @eswak and we expect to be audited soon. Roughly $100M of each stable (USDT, USDC, DAI) will be acquired over the course of 1 month using the 6 trading pairs.
To be conservative, we think the daily volume created by Fei Protocol should not exceed a certain percentage of the daily volume per pair.
By doing swaps every 10-60 minutes on each of the 6 pools, we will acquire the 300M stablecoins in less than a month (a few days for the most liquid pairs, a few weeks for the less liquid pairs). These swaps shall be small enough to have small slippage in every pool, but not too small as the cost per swap is ~170k gas.
There is a risk of sandwich attacks when the protocol will perform the swaps (a bot decreasing the price of ETH just before our swap, and pushing it back up after our swap), but in any case a backstop is implemented so that if acquisition price is less than 98% of the Chainlink oracle price of USD/ETH, the swap will revert. In layman terms, it means we should not lose more than 2% during the conversion. Both the oracle and threshold are configurable (should be in the 1-3% range, and Chainlink oracle is probably safer than an Uniswap TWAP oracle).
Spreading buys over time is also a good way to “dollar-cost average” our position, because the value of ETH could go up or down.
Anyone will be able to call the swap() function after the 10-60 minutes delay of each pool, and this call will be incentivized with FEI to cover the gas cost of helping the protocol swap its collateral.
The exact parameters for each pool (swap size, swap frequency, maximum allowed deviation from oracle value) will be detailed for the snapshot vote.
These are estimated dates that do not depend only on this working group:
- Initial discussion with community on week of 10th May
- Audit/code check to be performed and snapshot on week of 17th May
- DAO Vote on week of 24th May