Falling into a "water dungeon" after going online, the algorithmic stablecoin protocol FEI may usher in 5 urgent improvements

Since the decentralized stablecoin protocol FEI completed the founding stage and launched the Ethereum mainnet, its stabilization mechanism failed to stabilize FEI at $1 as expected, and the burn mechanism it set up also forced participants to be trapped in the protocol , For a while, the FEI agreement fell into huge controversy.

In this regard, Fei Labs founder Joey Santoro responded to the current situation of the FEI protocol and put forward 5 urgent improvement proposals aimed at better stabilizing FEI around $1.

Joey Santoro:

“There’s a lot to talk about in general, like protocol integration and diversification of the PCV. Over the next few weeks we’ll be able to leverage the protocol’s position for some successful integrations and stabilize the peg.

In this discussion, I want to focus on the short-term situation related to listing and anchoring: 1. PCV and FEI in circulation are huge;

2. The only current use case of FEI is to provide it as AMM liquidity, or to trade it as ETH/TRIBE;

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3. The selling pressure in the market is very strong, and the price of FEI in the secondary market is about $0.9;

4. The price change of the oracle machine also affects the timing of reweight; direct incentives are working as expected, and the pressure of buying and selling is concentrating FEI's secondary market price between $0.88 and $0.90, which makes The reweight does not happen because the buy postpones the reweight.

Overall, I think it's healthy to allow a lot of the accumulated selling pressure to flow out so that reserves and prices can stabilize. Here are some options for short and long term improvements: 1. Use the Guardian mechanic to force trigger reweights to allow people to sell Fei, which is a bit clumsy as it causes the price of Fei to go up and down, but this can be done instantly , and communicate through twitter etc.

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2. Increase the growth rate of rewards, which may eventually lead to a situation where there is a lot of buying support and an inflationary situation that keeps the price around $0.90 low. DAO voting can be done directly.

3. Set a predefined rhythm for reweight, such as every few hours or every time the price falls below a certain percentage. This requires minimal contract changes as well as DAO voting.

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4. Use the ETH reserve to stabilize the price of FEI more directly, which requires more substantive contract changes, and the entire process of writing, reviewing, and voting may take 1-2 weeks to complete. This creates a floor price on FEI, which could go as low as $0.95.

5. Limit the burning percentage to 2%-5%, which can speed up reweight and simplify integration.

In response to the above proposal, Fei community member sidneybane gave his opinion:

“I support options 1 and 3, in the long run I think option 4 is the most promising, but 1-2 weeks to restore the anchor is too long (affects confidence).

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Summary:

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1. Option 1 and 3 will attract arbitrageurs, which is good because they make up the natural demand in the short term (first two weeks), the anchor will recover, and then the arbitrageurs will exit themselves.

2. FEI needs to prove that all current theoretical mechanisms can work to restore confidence and show that there is a strong/fast community to protect user value (stability).

3. The cost of implementing plan (1) and plan (3) from PCV funds is very low (the current FEI agreement is over-collateralized);

As others have mentioned, until these mechanisms are proven to work for stabilizing FEI, FEI will not get any respect as a stablecoin, nor will it get good PR from the wider community. Why is this important? Because unless people believe the system works, there won't be more demand for FEI, or wider ecosystem integration.

Interoperability is one of the key components of a successful DeFi protocol.

Yes - frequent reweights will attract arbitrageurs, however, I don't see this being a bad thing in the short term (since natural demand is lacking). FEI needs arbitrageurs as ecosystem participants, and it is a core component of the system in the long run. If an arbitrage opportunity for FEI arises, they will be attracted and restore the anchor for the community.

Reflexer (RAI) faced the same problem and managed to solve it in the first few days by adjusting the incentives for arbitrageurs.

How is this going? Well, people's confidence in the system becomes high, and when FEI (RAI in the real world) falls below the anchor price, they start buying FEI because they believe that FEI will recover, which will naturally lead to system stability.

Clearly the market is telling us that the current incentives are not enough to support a FEI peg at $1, however, in my opinion, passing options (1) or (3) will be effective and thus restore market confidence .

At present, many members of the crypto community are watching the FEI drama, and I want to show everyone a quick and powerful response and regain the lost trust.

Overall, PCV is currently overcollateralized (even after reweight) due to the burning of a large amount of FEI. To stimulate economic growth by restoring confidence, it is cheap for TRIBE to burn some "revenue".

Any good business is willing to burn cash in the short term for long term growth. On top of that, with $1 billion in assets, I believe PCV will soon see strong DeFi yields, which may fully cover the cost of the few reweights we did in the first few weeks.

In addition, many community members posted their views.

In this regard, joey concluded:

"We've discussed the various implementation tradeoffs in detail, I'll summarize the main points here and can do a snapshot vote on this.

There was a reweight recently which reset the fei spot price and reward rate, then the fei was immediately smashed back underwater, followed by another 10% burn rate.

Forcing reweight or increasing the cadence of reweight through options (1) and (3) will help after multiple reweight adjustments, but these solutions will bring a lot of opportunities for arbitrage robots in the short term.

Increasing the growth rate of incentives through option (2) will only shrink the current status quo, allowing it to iterate faster. This option may be slower to restore anchoring and reduce selling pressure than options (1) and (3), but may make more sense in the long run.

Limiting the % cap of burns and rewards within a reasonable range of 2%-5% will help bring the price of FEI-ETH on uniswap closer to the secondary market price, which allows for more accurate integration of oracles and does not There are severe penalties for selling. It also makes reweighting happen faster when going further below the anchor price, as rewards can catch up to burn.

Selling reserves at a fixed discount (say 5%-10%) or by auction would create a price floor that unleashes a lot of selling pressure that would increase over time to restore the peg. I think doing this with a combination of some of the underlying factors above would be the healthiest and fairest approach.

We need more discussion on mechanism changes, but implementing one or more of the above proposals in the short term could help ease selling pressure and restore the peg while maintaining PCV. We also discussed many other ideas, but these required more planning and testing before implementation.

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