FEI developers raise $1.3 billion as users incur losses

The developers of the algorithmic stablecoin FEI raised 639,000 ETH ($1.3 billion at the time of writing), and the pool in the FEI-ETH pair became the largest on Uniswap — $2.55 billion. The hype led to a misalignment in its system and “paper” losses for participants in the issuance by 34%.

Biggest launch in Defi history? @feiprotocol raised $1.2B from its Genesis event, and the $FEI — $TRIBE pool is #1 on Uniswap with $2.6 BILLION in liquidity.

Simultaneously, retail investors got predictably rekt.

Here’s how the drama unfolded:

— Jon Wu (@jonwu_) April 4, 2021

Details of what happened were revealed by the user going by the handle @jonwu_. According to him, the stablecoin model envisions the creation of the so-called Protocol Controlled Value (Protocol Controlled Value or PCV).

The mechanism maintains a 1:1 peg to the US dollar via the buying/selling of FEI supply. The reserve is frozen and used in the event of a prolonged deviation in price until it recovers.

PCV is formed from user funds at the moment of FEI’s issuance with no possibility of reverse conversion. This mechanism differentiates the project from its peers, and its creators are effectively endowed with central-bank-like powers.

To maintain stability, FEI embeds direct incentives. If the stablecoin’s price falls below $1, the seller faces a penalty calculated as (Distance from the peg in percent × 100)^2. The buyer will receive a reward in the form of additional tokens.

Selling $FEI below its $1 peg triggers a burn mechanic that gets exponentially worse the further price is from the peg.

Penalty = (Distance from peg * 100)^2

Right now $FEI is 5.96% off its peg, so the penalty for selling it is a whopping **35%**. pic.twitter.com/AHGqsOGNfk

— Jon Wu (@jonwu_) April 4, 2021

The governance token TRIBE was provided in the DAO. It was distributed among 17,000 participants in the initial FEI issuance as part of the airdrop, which amounted to 10% of the anticipated issuance.

To generate interest in the stablecoin and the issuance of 100 million FEI, project representatives set the token price in a range from $0.50 to $1.01. After that, for an issuance of FEI at $1 you would need to lock in ETH worth $1 plus 1%.

The demand for the stablecoin, backed by venture firms a16z, Framework Ventures and Coinbase Ventures, ultimately reached $1.2 billion. The ceiling was reached when the amount raised surpassed $250 million. Many participants were convinced they were buying the stablecoin at a discount.

The FEI price, which had surged to $1.26 at the time of writing, stood at $0.942 according to CoinGecko. This implies a penalty of 33.8% for those wishing to sell the stablecoin, based on the formula above.

The post author attributed the situation to the presence of TRIBE. In addition to the airdrop, participants had the option of an early exchange of FEI for the governance token via the project’s own mechanisms. According to расчетам, users bought TRIBE for $383 million.

Since trading began, TRIBE has fallen from $3.18 to $1.92 at the time of writing. Some investors swapped FEI for the governance token to then convert to ETH. The transfer of FEI to TRIBE is not subject to penalties, creating an arbitrage opportunity. Users could buy devalued FEI with a bonus and cash out via TRIBE without penalties.

The predictably unfortunate problem with handing out free shit is, well, people will want to dump it for something that actually has value — $ETH.

As a result, whales took retail to the fucking woodshed.

Look at this post by @angelomint of a whale who made a cool 650 $ETH: pic.twitter.com/N1DJtTLb9z

— Jon Wu (@jonwu_) April 4, 2021

Subsequently, Uniswap began routing FEI transfers to TRIBE via Ethereum. As a result, the described scenario lost its sense, since the transfer became subject to penalties in addition to fees.

Currently, the FEI-ETH pool on Uniswap holds $2.55 billion. FEI holders can effectively withdraw liquidity by paying the penalty. The protocol’s incentives did not restore the price of the stablecoin to the $1 peg. The value of TRIBE obtained from the airdrop is relatively small and does not cover potential losses. Users who had previously acquired the governance token faced additional losses.

According to user @jonwu_, the developers should reconsider the stablecoin’s algorithm to fix the situation.

Back in March, due to a flaw in the Auction Keeper system during Ethereum’s price slump, attackers withdrew more than $8 million from MakerDAO.

ForkLog reported on the lessons the DeFi ‘Black Thursday’ taught.

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