This is an interesting point.
To rephrase what @cozeno said, the PCV doesn’t just hold ETH, it makes market with it. So when ETH crashes, PCV loses extra from the impermanent loss, since it will be selling ETH at the pre-crash price. And he is suggesting that PCV be a more active market maker, and change the price of FEI by reweighting in times of ETH volatility.
I think this is an important point that may need to be addressed, but I haven’t yet wrapped my head around how exactly IL interacts with reweights. Uni v2 AMM (xy=k) is the simplest market maker that never reweights; ironically, it works well because of this simplicity. In Uni v3, we are seeing sophisticated market makers that “reweight” all the time. They also work well if they have a good reweight strategy. The PCV is an in-between market maker that reweights deterministically to keep the peg. Does this make it a very bad market maker that makes losses when it shouldn’t? Can price fluctuations around a constant long term trend hurt the PCV? How would savvy traders trade against a market maker who follows a deterministic reweight schedule?
Reweight without reweights implicitly assumed that ETH remains stable. The assumption may have been fine when the volatility of FEI itself was the biggest concern. But once we start considering ETH volatility, reweight is no longer just a pegging mechanism; it is an active market making strategy.