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A well-liked and adaptable cryptocurrency in the decentralised financial space is stablecoin. They contribute to lowering the overall price volatility of cryptocurrencies, which lowers risks and creates hedging opportunities for the sector. However, there are still a number of problems plaguing the current stablecoin models. The fact that current stablecoin solutions are frequently protected by other volatile cryptocurrencies or controlled by centralised third parties is one of their main drawbacks. As a result, present solutions are frequently not truly decentralised, cannot be scaled, and may be inefficient as a result of excessive collateralization.
The Fei protocol was created to address these issues at hand.
The software firm Advanced Blockchain AG supports the creation and application of this enhanced stablecoin paradigm, which combines price stability with total decentralisation, with its investment in the Fei protocol.
The Fei protocol was created by Fei Labs Inc. as a fully decentralised stablecoin project. Through a number of advances, the project seeks to enhance the idea of stablecoins. To maintain the Uniswap liquidity pool and FEI, its native stablecoin, near to the exchange rate of the US dollar, it employs a stability technique known as Protocol Controlled Value (PCV) as well as a number of other measures. Additionally, it introduces the TRIBE native governance token.
In March 2021, the Fei protocol was successful in securing $19 million from significant industry venture capital firms. Users could purchase tokens at a reduced price of $0.50 and above if they wished to support the Fei project during its early stages. The development team determined that 100 million FEI would be sufficient to integrate FEI into other DeFi protocols, therefore this number was chosen as the primary release target. Users had to put up $1.01 worth of ETH after the discount phase was over in order to issue $1 worth of FEI. With the help of this strategy, Fei was able to quickly and effectively offer its users a stablecoin while building up sizable ETH reserves.
Understanding how to use the ETH token is crucial. The initiative creates an FEI/ETH liquidity pool on Uniswap, the biggest decentralised exchange running on the Ethereum blockchain, giving the stablecoin an instant secondary market with plenty of liquidity. Unlike other algorithmic stablecoins that draw third parties by utilising the token’s inflation, the Fei protocol itself serves as the primary source of liquidity for its stablecoin.
The ERC20 stablecoin FEI is exclusive to the Fei protocol. It is a decentralised stablecoin that employs a number of measures to (theoretically) maintain a more effective and equitable capital allocation than previous initiatives. The Fei protocol aims to establish a thriving market where FEI/ETH can be exchanged in close proximity to the ETH/USD pair.
The quantity of FEI tokens is practically limitless, unlike most other tokens. It is controlled by the minter and burner contracts, which use bonding curves and trade incentives to regulate the token release. Only for a specific group of transactions does the FEI token display some ERC20 nonstandard functions.
250 million FEI will serve as the bootstrap aim for the ETH bonding curve. When FEI’s price reaches this goal, also referred to as “Scale,” it will have stabilised at $1.
Two essential components of the Fei protocol, specifically:
PCV, or Protocol Controlled Value, and
Although the project will initially only support one bonding curve valued in ETH, it will permit the development of more curves in the future.
Stablecoins are digital currencies that are linked to another asset class, such a particular country’s currency. The price of the cryptocurrency is guaranteed to be equally stable by this typically stable and predictable equivalent value. As a result, stablecoins are viewed as investments with low risk and volatility, especially when compared to other kinds of cryptocurrencies.
The majority of stablecoin projects have created their own techniques for stability. Usually, their value is linked to fiat money or other cryptocurrencies. The terms for this are, respectively, fiat-collateralized and crypto-collateralized stablecoins. Non-collateralized stablecoins, on the other hand, are a fascinating new subcategory that derives value from algorithms that modify the token supply in response to the demand for the token itself.
A single fiat currency or a basket of currencies serves as the basis for the value of a fiat-collateralized stablecoin. According to this paradigm, which is employed by companies like Tether, a centralised organisation owns assets and issues tokens based on those holdings. A type of promissory note is represented by these tokens (IOU). Because it reflects a claim to another asset with a certain value, such a system provides tokens value. However, this strategy’s centralization is a drawback. With this model, the issuing party must be trusted to a certain extent. Holders of tokens must have faith that the entity issuing the tokens is the rightful owner of the assets needed to redeem them. For token holders, this strategy creates a significant counterparty risk. Tether emphasises the problems with
Stablecoins with cryptocurrency collateral get their value from the underlying cryptocurrencies. As a result, these stablecoins are supported by other reliable blockchain assets. Other stablecoin projects also make advantage of the model that BitShares invented. In this instance, another cryptocurrency serves as a guarantee for the stability and security of stablecoins. The decentralisation of this strategy is its key benefit. Users don’t need to rely on a third party because the collateral is held on a smart contract. The ability of projects to manage the volatility of the underlying cryptocurrency is the fundamental issue with this strategy, though. The issued stablecoins might no longer be sufficiently secure if its value declines too quickly. Over-collateralization would be the simplest way to solve this issue, but this would lead to
Non-collateralized stablecoins employ algorithms to change their value in accordance with supply and demand factors. More stablecoins are either issued to or taken away from the free market depending on the coin’s current value. In order to provide counter-regulation and maintain the token price as steadily as feasible, this system was created. The system is decoupled from other money and resources in this way. Because the algorithm alone controls it, it is also decentralised. This paradigm, meanwhile, is not without flaws. For the system to be stable, it must grow continuously. Additionally, it is challenging to study and forecast how much the system can sustain while still functioning, as well as to estimate at what value the system would collapse.
On March 31, 2021, Joey Santoro, Brianna Montgomery, and Sebastian Delgado introduced the Fei protocol (left to right in the image below).
Protocol Controlled Value and direct incentives are the foundations of Fei.
Many stablecoin initiatives use a subset of the user-owned total value locked (TVL) paradigm called Protocol Controlled Value (PCV). The TVL concept gives users an IOU for their deposits, which they may then withdraw whenever they want (outside of the lockup period). The deposited funds must remain there as long as the incentives are active for projects that follow the TVL model, which means that they must rely on token distribution payouts.
PCV approaches this system in an unusual manner. The Fei protocol permanently holds onto the user-deposited monies, in contrast to the aforementioned approach. By doing this, the protocol can concentrate on crucial responsibilities, including keeping the $1 peg.
The deposited ETH is locked in Uniswap’s FEI/ETH LP position as the “official market” and is owned by this protocol. The protocol’s operation is altered in two primary scenarios:
When the price of FEI falls below the fixed price, PCV will take 99% of the protocol’s liquidity from LP and use it to buy FEI, stabilising the price. While extra FEI will be burned, the remaining PCV will be replenished as liquidity.
The difference between the current and goal prices will be determined by PCV when FEI is higher than the fixed price, which will result in further FEI printing. The circulating supply will grow, bringing the price of FEI back to parity.
In order to keep the PCV-set price constant, the routine reweights Fei every four hours, with a 0.5% minimum deviation from the fixed point.
The direct incentives feature of the Fei protocol encourages the use and trade of the FEI stablecoin, as the name implies. As a result, investors are discouraged from selling their tokens when the price falls below $1 and the exchange rate is kept stable. A portion of the FEI that investors sell will be burned when they do so.
The employment of rewards and penalties to get at the desired FEI price is the most crucial component of the direct incentive system. The protocol employs token creation and destruction to preserve the $1peg.
Instances when the price of FEI trades below the $1 threshold are handled by the incentive, while those where it trades beyond that threshold are handled by arbitrage. As a result, the ecosystem fully supports the price of FEI.
A single FEI is currently worth $0.9993.
The decentralised autonomous organisation (DAO) that the Fei development team established uses TRIBE as its governance token. One billion TRIBE units can be purchased overall, of which 100 million are set aside for members of the genesis group.
The Uniswap FEI/TRIBE liquidity pool allows holders of the TRIBE token to participate in the future governance of the Fei protocol while also earning a portion of the transaction fee charged by the DEX. There are no token lockups for FEI/TRIBE holders who wager their tokens in order to earn more TRIBE.
There are 437,749,741 FEI in existence as of this writing, with a market capitalization of $434,753,328.
The supply of FEI stablecoin has no upper limit. The supply changes in response to the demand. Return curves are used to fix the FEI price at $1 and help coins enter circulation. Users may repurchase FEI on the bonding curve when demand for it rises. Entry fees were initially kept low as a way of thanking early supporters. The Fei technique also permits the development of fresh bonding curves. Its main bonding curve, however, will be expressed in ETH. Although ETH won’t be traded on bonding curves, users will still be able to sell their ETH on a secondary (PCV) market.
The Fei protocol seeks to develop a fully decentralised stablecoin that is free of the problems that many other stablecoin initiatives experience. As a result, there won’t be any third-party token printing or excessive collateralization to keep the token peg secure.
Three key benefits of the Fei protocol include:
Guaranteed liquidity: Since the protocol itself is the primary owner of the liquidity, FEI owners don’t need to worry about crypto whales. It is traded on Uniswap in ETH/FEI parity and is funded by the FEI yield curve.
Support balancing: The Fei protocol can change the Uniswap price and restore support if FEI price support is inadequate.
Management: The locations where PCV is applied may also differ. PCV can control interest rates and open the door for FEI token borrowing.
Long-term returns are favourable due to FEI’s inherent value, particularly in the DeFi area.
The foundation of decentralised finance is stablecoins (DeFi). Customers want to utilise Dapps like Compound and Aave without being concerned about price changes. However, the majority, if not all, of the currently available stablecoins are insufficient. Fiat-backed stablecoins, like USDT, are highly centralised because only one organisation manages their collateral. Stablecoins supported by crypto are now having scaling issues. These stablecoins also heavily rely on leverage and debt to support transaction volumes.
However, the Fei protocol can offer the stability, simplicity, and global availability that other stablecoin projects cannot because to the use of unique technologies.