Genesis was a success; we shouldn't undermine the design of FEI to relief sell pressure

I want to offer a perspective that I haven’t seen expressed so far.

For the most part, the genesis was a success. It raised more than twice as much capital as anyone expected it to, and it rewarded its participants exactly as it was intended to. After launch, the incentivized fei-eth uniswap pool has behaved as it was designed to behave in the face of tremendous sell pressure. And the price of tribe in the fei-tribe uniswap pool dropped in reaction to the unavoidable action of whale backed bots. There’s also been a tremendous amount of community engagement. Leveling fair criticisms about the way the last couple of days have played out and offering many different solutions to the problems we face in the near future and in the long term. The team at fei labs is evidently listening to our concerns and preparing to implement the potential solutions. To me, this seems like a promising beginning to a radical experiment in direct democracy and decentralized finance.

There are two types of genesis participants that seem to have been taken aback by what’s happened so far.

On the one hand, there are people that participated in genesis under the impression that, no matter what, they’d be sold fei under a dollar and then they’d be able to promptly sell fei at a dollar. And that’s understandable. If much less eth had been committed, genesis participants would have bought fei under a dollar. And after several weeks or months, when the protocol reached scale, they would’ve been able to sell their fei for about a dollar’s worth of eth. I can see how the well intended spread of incomplete information led many people to think that such a scenario would occur even after the protocol the protocol raised more than $250,000,000. And I think it’s extremely important for the long term health of this community that people that acted under this misunderstanding don’t feel cheated in the long term.

On the other hand, there are people that participated in genesis under the impression that, no matter what, pre-swapping was an opportunity to buy tribe at the cheapest possible price. And there was one likely scenario where this effectively held. Inevitably, there would be some sell pressure from whales that considered airdropped tribe to be a quick profit. I spent some time calculating what kind of profits could be made under ideal circumstances (access to the first blocks after launch, etc…), and came to the conclusion that, more or less, for every $100,000,000 committed and fully swapped, there was an opportunity to profit about $1,000,000 with a $3,500,000 investment, dropping the price of tribe to around 60% of the preswapped price. I haven’t done the work of pouring over the transactions on the tribe-fei uniswap pool to determine if in fact whales have profited in this proportion, but I did notice that the price around which tribe stabilized for the first couple of days ($2) was indeed around 60% of the preswapped price (around $3.25). But even having done these calculations, I invested 1/5 of all the capital to my name in the genesis and chose to preswap! The reason I did this was two-fold: (1) I knew I didn’t want to spend my weekend looking for tribe buy signals to make sure I bought at the lowest price; (2) I was optimistic that other users would use their weekends looking for tribe buy signals, pushing the price of tribe back up to an effect break even point. But as we know now, my bet was wrong. At least in the short term. The price of tribe seems to be dropping under $2 in reaction to the widespread worries that the protocol is flawed. Just as before, I think it’s extremely important for the health of this community that people that acted under this other misunderstanding don’t feel cheated in the long term.

All that said, I think that appeasing the temporary sell pressure on fei is not the right approach.

On the one hand, this is contrary to the original design of the fei protocol. Direct incentives coupled with occasional reweights are central to the innovations introduced in the white paper. Think about it this way: as a community, we may all have lost a little capital at the moment; but on the flipside we now have the opportunity to collectively use $1.3 Billion in ways that would never be possible if we all acted individually. That’s what we participated in!

On the other hand, the best possible solution to relief the sell pressure will return $1 for every $1 put in to anybody that wants out. All of those participants will still leave the protocol with a sour taste in their mouths after having spent days or weeks fighting to recover money they misplaced. Needless to say, as much as we want to look out for the interests of people that misunderstood the protocol and feel trapped, responding to their demands is not necessarily advisable. If they knew better than the rest of us how a stable coin should work, they wouldn’t have placed their money in fei. Protocol controlled value isn’t collateral for fei. And we shouldn’t use it that way. Users that want collateralized stable coins can buy USDT, USDC, DAI, etc. And they could have bought those tokens before saturday. Here we can use protocol controlled value in new and creative ways. And every time we decide to use it instead to please unsteady hands, there’s an opportunity cost. Where else could that money have been used? If you’re part of this group of participants that is eager to sell your fei for a dollar, I encourage you to consider what you could do instead if you choose to become an active member of the community you happened upon. Collectively, we own $1.3 billion dollars. That’s amazing!

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This is great and so accurate. I am enjoying watching the sell penalty go up – more people are selling, more FEI is being burnt, and the remaining FEI is worth more!

Not to say that the team has not made mistakes. By having such a large Genesis pool we essentially captured the market demand for FEI up front. Now there’s not enough unmet demand to take advantage of the Incredible Deals that are on offer for FEI buyers.

I am somewhat concerned about the approach the bots are taking to the reweights. Buy cheap, sell immediately at reweight, repeat. Makes it difficult to break out of the cycle of reweighting until significant new demand appears.

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Perfectly said. I think the team needs to have an active voice on all social platforms (including discord) and repeat this message constantly: it’s worked as expected… those who want to sell are keeping the price low at their own expense. Nothing is broken, in-fact it’s working as expected. Long term smart hands will prevail and bring the peg to $1.

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Totally agree with all of this! Excited for the next month and see the system continue to work as intended. It is punishing the predatory behavior. This is a project in human nature and punishing the bad side.

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EXACTLYYY!!! This is what I have been saying. Nothing is broken, bad behavior is punishing everyone.

However long term they can’t do this. Consider:

Bill buys at $0.96 and get reward x. Person #2 buys at $0.97 and gets reward x-1… this repeats until $1.

Then at $1 it’s a race to sell. Bill sells first at $1 and gets out without a penalty and keeps the reward of x! Then because of this sell pressure the price drops to $0.99. So person #2 sells at 0.99 BUT it costs them to do so. Now instead of reward x-1 they only get reward x-1-y (where y=the burn rate at $0.99). Then person #3 sells but this time at 0.98. Well now there is no reward. Person #3 bought at 0.98 and got reward x-2 but to sell they have to accept a much larger burn rate than person #2. Anyone who bought under $1 will lose money if they sell at 0.98 or below. So they now decide to hold. There is no more sell pressure coming from the sophisticated whales.

But there is still a reward for anyone who wants to buy. Bill my come back and buy $0.98 to try and sell again at $1. In doing so he again creates buying pressure. This repeats itself until there is no reward or burn.

Does this make sense?

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yes, but I think that is the point. At the end of the day, a stablecoin is for utility. If stability is achieve and use cases are found (in DeFi) then all is well. The mechanism is for stability not profit.

you are bot owner right?

It’s hard to tell how what kind of equilibrium speculators on the fei-eth pool will reach.

As far as I can tell, at the moment they’re playing a game that is biased in favor of the protocol. My guess is that, by necessity, most participants that buy fei with the hopes of selling immediately after the peg is stabilized are front run by someone else and stuck with their fei.

It would be interesting to know the reward distributions among these speculators. I’m not sophisticated enough to systematically infer these distributions from etherscan. But I’m sure someone is.

The way I see it there are roughly two scenarios (and many gradations in between):

The first is that a very few bots with arbitrarily deep pockets for gas fees are reaping almost all the rewards of this speculative action. This would be the consequence of a severe, underlying, unequal distribution of ETH. My worry is that as more and more speculators are simply losers, they’ll drop out of the race. But the winning bots will stay. Potentially this equilibrium dynamic will be harmful for the protocol. For it might become a sort of ETH faucet for this greatest of all bots. If this is the case, it might indeed be necessary to tweak the direct incentive parameters to prevent the resulting long term instability in the price of fei.

The second is that very many bots stand a chance of winning any one race with very small probability. I think this is more or less the scenario that Commstark describes. And this scenario is less concerning. In fact, I think this is a repeating version of what might have happened during genesis. A great many people recognized a small opportunity for short term profits. They all made their bets. Many of them made significant bets. Both in absolute terms and relative to their portfolios, as far as we can tell from etherscan. Only a very few of them were able to cash out. The rest lost the race and their capital became PCV. A lot of people are comparing this to Hotel California. But the more accurate comparison is to a casino. Needless to say, fei is not a casino. But it has the advantage that if you treat it like a casino, it does win in the long term. The solution to this scenario is simple and, I think, will be self-mediated. Speculators will realize their predicament and decide to stop playing an unfavorable game.

Individual pockets are only so deep.

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Lol, thankfully no. As I say in my response to Commstark, I think the bots might as well be playing an unfair game in a casino. I hold a small amount of tribe. I’m not sure how I could convince you of this, but I’m writing this response in case anyone is wondering.

Thanks, this was helpful. “The bots” may be taking rewards, but individual bots are losing just like individual human sellers. Hopefully the “ETH faucet” scenario is not possible.

I agree and appeasing everyone that wants out by giving them the 1$ peg without the DI punishment would 100% lower the selling pressure. But then what stops me from buying FEI under the peg, getting a 5% purchase bonus in FEI… and dumping it right back? This makes no sense to me. It would only invite arbitrage and bots to the platform.

I also think although the PCV is insanely high rn, it fails to perform its function and maintain the 1$ peg during times of extreme selling pressure. This is definitely going to happen again, and if they keep the system the same way it is now, no one will stay confident in FEI’s ability to peg accurately to the dollar… essentially making it useless

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Right now what stops you from buying under the peg and dumping it right back is that someone with a deeper pocket than you will dump before you do. The price will drop to around the same price at which you bought. But when you try to sell the penalties are considerably greater than the rewards you earned when you bought. After all, the penalties are quadratic in the distance from the peg whereas the rewards are only linear in the distance from the peg.

I think because of this most people should be disincentivized from buying fei under the peg with the intention of selling as soon as the peg is reset by a reweight. Moreover, this shouldn’t surprise anyone. Opportunities to reliably earn more that 10% on your investments within a day don’t exist. In the world of traditional finance, you’d be lucky if you earn that in a year.

That said, there are still incentives to buy under the peg at the moment.

The simplest one right now is that anyone that assesses the tribe to be under priced at the moment can buy fei on the incentivized market to then buy tribe with it.

Another one is that anyone that believes that the peg will stabilize in the long term by the responsible actions of the community, can earn a long term profit if they buy under the peg with an intention to sell in the long term.

Yet another one is buying fei in order to provide liquidity in the highly active fei-eth pool. I’m not entirely sure if this is possible in the incentivized pool. Before launch, I was under the impression that it wouldn’t be. That the only liquidity provider for that pool would be the protocol. But I’ve seen some fairly small adds and removes on the pool that look like they’re from retail investors.

The sky is the limit as to what other incentives we might create for people to buy fei when it is below a dollar. Promising speculators that they can sell at nearly a dollar by using the PCV as collateral is the least interesting of these. That kind of solution belongs to other stablecoins. For me, and I would imagine for many other genesis investors (I would even go on a limb and say for a silent majority), using PCV as straight up collateral would entirely defeat the purpose of fei. The undercollateralized stablecoin already exists. It’s called USDT. And anyone is able to participate!

The role of PCV is to maintain the 1$ peg during times of reasonable selling pressure. But not all selling pressure is made equal. The current selling pressure comes from people that were trying to make a quick profit off of the direct incentives mechanism. I’d go as far as claiming that fei is designed to not accommodate this selling pressure. And it’s doing a good job of it. Moreover, the current selling pressure is unique in that it arose before the community was able to make any significant decisions about how to make use of the PCV. One example that was floated around elsewhere on this board (I don’t remember by whom) is to put a significant portion of PCV in a lending platform like yearn and store the interest rate in a dedicated faucet that pays 90 cents (or whatever threshold) for every fei to anyone that’s desperately trying to sell. If there are long periods of stability, this interest will accrue tremendously over time. It’ll serve as a sort of rainy day fund to prevent the sort of situation we’re in at the moment if it arises in the future. This represents the way in which fei can find unique solutions to the liquidity problem that other stablecoins can’t. That it didn’t accommodate a crazed run immediately after launch is a virtue, not a flaw. It’s protecting its own long term viability.

My post above was a reply to Jewishbagels but I forgot to make it clear! Hehe!

It is a real shame because frankly the raise mechanism was stupid and has ruined the project. Why’s it stupid? Well now they are saying PCV is overcapitalised. How stupid is that to raise far more than you need and who did they raise it from? They raised it from people that immediately want to dump fei as they bought it for the governance token. Instead of selling fei why didnt they sell fei / eth LP tokens with linear release? Would have attracted less apes and linear lock up would have attracted long term supporters.

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I agree that a linear release of whatever was offered on genesis might have avoided some of the discontentment that’s going on right now. But in some sense it would’ve been merely a psychological difference. Precisely what people are discontent about at the moment is that they can’t cash out without a loss. And I think it’s optimistic to think that this would have been effective at attracting less but smarter money. In the end, I think what it comes down to is a problem of viral misinformation which might as well have plagued a different genesis design.

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So basically you are saying you dont think lock + linear release wouldnt have detered any flippers? Lock itself would have deterred a lot of people from participating as there would be no opportunity to immediately flip at a profit

Well assuming the flippers acted rationally, no one would’ve hoped to profit much from flipping fei after friday morning, when the genesis had already raised about 250,000,000. Yet it drew a billion on top of that. It’s safe to say that anyone that intended to flip fei wasn’t acting rationally. I see no reason why we should infer they would have acted rationally under a different offer.

Of course, this is not an argument worth getting deeply into because it’s difficult to defend any of our points with evidence. Genesis only happened one way, and it’s impossible to tell what would have happened if anything had been different. The butterfly effect or whatever.

Evidence indicates locks deter

Excellent message and thank you. I too am in this for the long term and believe in this project - and that the PCV amount is very small at the moment and will grow massively as the project advances. Really elegantly said - thanks.

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