Thoughts on FIP-2: The Redo Button

I feel compelled to speak up on this one for a few reasons. I want to protect the reputation of PCV currencies because I feel it is revolutionary, but more than that I want to see the tribe come out of this alright.

FIP-2 deeply concerns me. I see short-sighted priorities here that carry risks of compounding the current spiral. I think you all would do well to remember that everything doesn’t need to happen overnight. This looks to me as the reverse of genesis and that makes it a redo, not an undo.

Sell pressure or peg deviation is not the problem here, they are symptoms. The real problems are:

  • A lack of confidence in the protocol. Users do not trust the mechanics or the future of the system, and so they’re constantly looking for the exit.
  • A lack of understanding of the protocol. So much messaging I have seen has been focused on “risk free arbitrage” and other short-term profit incentives to get involved in FEI. The value proposition of FEI is in efficiency on the supply side, not profit incentive on the demand side. The successful state of this project is not particularly profitable for participants, just like DAI is not profitable - it’s just useful. Trying to drive speculative demand (which FIP-2 does once again by giving the impression that it’ll quickly push FEI back to 95c+) is not a viable route and can easily compound the issue.
  • A lack of patience. This goes along with the previous point, and the get-rich-quick mentality I watched form prior to genesis. Genesis should have shown that all or nothing approaches, with singular events to accomplish something, are dangerous and rarely work. Spreading things out over time is far more effective. It allows the market to do the work for you so you can preserve scarce resources (PCV).

My concerns are the following:

  • A large-scale buyback will fail to solve the problem, and will only serve to accelerate the downward spiral. Except next time there is less PCV, less liquidity, and even less confidence.
  • A release of hundreds of thousands of ETH back into the market could draw down the ETH price and create a downward spiral on the PCV itself. It’s pretty clear to me that Genesis pumped ETH; do not count on the $ value of the PCV (and resulting over-collateralization) if you put all that ETH back in the market because the same will likely happen in reverse.

What I see as the solution:
Criticism is easy part. Solutions are hard. However, I think this would work.

  • Use a tweaked version of the reweight mechanism to do frequent low volume buybacks. This could be as many as 4 times a day, and as low as $250k each.
  • These re-weights should not bring price back to $1. Rather, they should simply bring price higher. Work your way up. By re-weighting to $1, all you do is provide an instant arbitrage opportunity that bots will always sell back down.
  • The goal here is to demonstrate to the market “we will buy back forever until price is back where we want it.” Instill confidence. It doesn’t need to happen immediately, there just needs to be tangible progress and a plan. People should respond to that plan with more patience and cooperation. This is a primary component of Olympus and, while I don’t think we will need to test it for some time, I feel confident that it works. (This is known as “forward guidance” in the central banking world).
  • Focus on drivers for PCV growth. I don’t know if this is even possible to any significant degree given the scale you’re dealing with, but you should sure as hell try. Any solution to the issues above comes with a massive amount of value drain and deadweight loss. That needs to be supplemented or it is just delaying the inevitable.

I’m happy to help out to some degree here if the team wants. I think the OHM bond mechanism would actually work quite well here in reverse (a floating pricing mechanism to facilitate the buybacks). The good thing is you have a ton of funds, and that provides a lot of flexibility. Maximize them, don’t waste them.