Native collateralized FEI lending

Hi all - new TRIBE member here and I’m very excited to be a part of this community! I have an idea that I think can add greater utility to FEI as well as increase the PCV over time, please read below:

For assets that are in the PCV (currently ETH / stETH / DPI) allow users to create overcollateralized debt positions and mint FEI against them (as you would in MakerDAO or Liquity) We could charge either a streaming stability fee or a one time mint fee, either would work.

Different collateral types can have different overcollateralization requirements (for example, ETH may allow users collateral ratio to fall to 110% before liquidation, whereas DPI may have a higher liquidation threshold at say ~150%)

Liquidations within the FEI system are where the magic happens. Instead of having keepers pay back the debt associated with an under-collateralized CDP, we can liquidate these CDPs with the PCV itself. If a CDP were to become under-collateralized, the protocol can simply seize the collateral within that CDP and add it to the PCV. After seizing the collateral, the protocol may decide to burn an amount of protocol-owned FEI that is equivalent to the amount of debt outstanding in the just liquidated CDP, or simply keep that extra FEI outstanding and use the newly acquired collateral to support the FEI peg.

Would love to hear thoughts/feedback, thanks!

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Hi @defiderp69 ! Excited to have you sharing your thoughts here.

Are you familiar with the FeiRari Fuse pool? It is a compound market that allows users to borrow FEI for the market interest rate.

Currently that only supports ETH, TRIBE, and DAI, but we could easily add DPI and wstETH. It might make sense to add more PCV assets to offer similar functionality.

Fei Protocol is earning interet on borrowed FEI in that pool, and could eventually add an additional admin fee.

I think leaning into composable lending markets to service this use case is simpler than adding CDPs to the core protocol

hi Joey, thanks for taking the time to read and respond!

I hear what you’re saying that the FeiRari pool already provides much of this functionality. I do think that having lending be part of the core protocol offers a few additional benefits on top of the fuse pool:

  1. Allows for higher collateralization ratios due to the PCV being an efficient liquidator
  2. Provides a known fixed-cost borrowing option for borrowers
  3. Allows the protocol itself to capture profits from liquidation

I think that FEI is uniquely positioned to enter this market if they wished because the PCV is such a great mechanism for maintaining peg. MakerDAO and Liquity both have their own mechanisms for peg maintenance, and in my opinion both of them have significant drawbacks.

In MakerDAO’s case they’ve included a significant amount of USDC as collateral which greatly centralizes DAI.

In Liquity’s case the redemption mechanism adds significant uncertainty to borrowers as they are always at risk of having their trove redeemed regardless of their OC ratio.

FEI has the power to offer extremely low collateralization ratios (down to 110% similar to LQTY) due to it’s PCV acting as a liquidity backstop which is equivalent to the Liquity stability pool. However, FEI has the added benefit of using it’s PCV for peg maintenance as opposed to having a redemption mechanism which puts burden on users.

The main drawback I see to this is that FEI does not want to market itself as an overcollateralized stablecoin and wants to scale “unbacked” and algorithmically.

Anyways these are just my thoughts, thank you for reading!

The most important factor in FEI should be the 1:1 redeemability, having more collateral is always better than not having it in a PCV model! In that sense this is a totally reasonable pursuit.

My general thoughts are the development costs are high and the benefits are clear but don’t outweigh the opportunity costs of pursuing integrations and other mechanism upgrades

Hi Joey, I hear what you’re saying with respect to the effort involved and the marginal benefit gained vs integrating with partners today.

Thanks again for engaging in this post!

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