The FEI price has been below peg since the protocol’s launch. The excess supply created by Genesis seems to have led to the current state of high sell pressure.
Through Immunefi, whitehat hackers disclosed two vulnerabilities and a bug related to how direct incentives are calculated and reweights are triggered. Direct incentives and reweights were paused using the Guardian to address these.
- Reweights could have been directly arbitraged in an atomic transaction
- The burn penalty could have been circumvented through a complex interaction with the uniswap pair
- Mint rewards for withdrawing LP tokens were being collected by the UniswapV2Router02, not the user. These could be siphoned by the next Uniswap caller.
The PCV remains in Uniswap as the system is paused, with no reweights or direct incentives possible.
Fei Protocol is designed to use PCV and incentives flexibly to power its stability and utility. While the work continues on the development and approval of a patch of the above issues, discussion continues on potential mechanism changes to improve FEI stability, including:
Post Launch Peg Discussion
- Initial discussion on ways to relieve the sell pressure on FEI
Possible Secondary Airdrop for pre-swappers
- Creating an airdrop for TRIBE holders
Burn or Stake Mechanic For FEI
- Create demand for FEI below the peg by taking all the burned FEI from incentives and transferring it to FEI stakers instead
Brainstorm: Change of direction
- Use PCV as a fractional collateralization pool
A summary of the constructive suggestions of the Chinese speaking community on Discord
- Capping the mint and burn incentives to release sell pressure.
Any adjustments to the core stability mechanism should also undergo a security audit. During this process, Fei Protocol can allow for direct redemption of FEI for ETH from the PCV to support the peg and alleviate sell pressure.
Members of the Tribe community @cryptozen, @HittingBOMBS, @Bruno and others have suggested an auctioning of PCV or selling at a discount. There are currently ~2 billion FEI of which ~1.2 billion are owned by FEI Protocol and ~200 million are timelocked in the TRIBE-FEI pool. The ~$950m PCV can directly support a FEI price of up to $1 for all user redemptions, with an excess of collateral.
The Tribe community needs to decide the exchange rate to use for FEI. For simplicity, we propose 2 options, a full redemption for $1 or a discounted rate of $0.90. If the Tribe community wishes to discuss additional options, it may do so. However, we believe that reducing the decision set will allow for clear consensus to ring through. We also propose a third option to not move forward with reserve stabilization at all.
The mechanism of this proposal would withdraw 75% of the PCV (~350,000 ETH) to a contract which offers to buy outstanding FEI at the agreed upon price, 1 or .90, of ETH relative to the oracle price. If this buffer gets exhausted the Tribe community can instruct the Fei protocol can allocate more PCV in a subsequent proposal.
Ultimately, TRIBE holders are responsible for the FEI peg, and the long term vision of a scalable decentralized stablecoin is the top priority. Ideally, the peg would be restored as quickly and effectively as possible, so that existing and upcoming FEI integrations have maximum utility.
How this proposal secures the future of Fei
With this change, we believe the Tribe community can begin to set a cultural tone for Fei Protocol of being flexible in its core mechanisms. FEI’s stability and utility should also be a priority in line with the PCV vision.
If this proposal succeeds, FEI’s stability mechanism will be temporarily altered to be reserve stabilization via ETH PCV. This would remain in effect until the existing mechanism has been improved and all changes are voted on and audited.
Reserve stabilization can become a core primitive piece of FEI’s architecture, with topping up of reserves coming from yield on PCV deployments or growth in FEI supply.
On Saturday at 4:00pm PT, a signaling snapshot vote will occur regarding the above. To summarize, the 3 options will be $1 reserve stabilization, $0.90 reserve stabilization, and no change.
Once the code is audited and peer reviewed it will be submitted to a Fei DAO vote.
TRIBE holders are likely affected by this proposal. On one hand, returning FEI to its peg is in the interest of the Tribe. On the other, reserve stabilization would reduce the overall size of the PCV. Other proposals to consider are to allocate at least half of the DAO TRIBE treasury to TRIBE holders over time through staking to reward long-term alignment with the Fei vision. The Tribe community should continue exploring current proposals like this one for further TRIBE staking rewards, and implement them after this proposal is complete and voted on through the Fei DAO.