Earlier this Saturday, FEI Protocol held its Genesis occasion, efficiently elevating over 639,000 Ether — roughly $1.3 billion — in dedication for its stablecoin. The Ethereum raised for the challenge can be used as collateral to mint its stablecoins, which makes use of bonding curves to take care of a peg of $1. FEI’s protocol mechanism additionally permits for direct incentives, which is “extra capital environment friendly, has a good distribution, and totally decentralized.” In keeping with the challenge, over 17,000 addresses participated within the occasion, offering $2.6 billion in liquidity to Uniswap.
— Fei Labs (@feiprotocol) April 3, 2021
Potential Controversy for FEI’s Mechanism?
Nevertheless, the challenge has already acquired criticism for its mechanisms. FEI’s use of protocol managed worth (PCV) implies that, when customers deposit collateral, their funds can’t be instantly pulled out. It is because the capital is owned and managed by the protocol itself — making it extra capital environment friendly and decentralized in comparison with different stablecoins.
The challenge initially allowed collaborating customers to mint FEI at $0.50 — a seemingly large low cost from the $1 peg. Because the Ethereum bonding curve would develop primarily based on provide, many customers anticipated that the stablecoin would attain its peg as soon as sufficient collateral was deposited.
Nevertheless, liquidity suppliers and short-term traders discovered themselves unable to promote their FEI for ETH with out incurring large losses on the commerce. This was due to the protocol’s direct incentive system which used a dynamic burning system to return the stablecoin’s value to peg. In keeping with the protocol’s white paper, promoting “FEI in a fast time-frame throughout a interval of excessive promote strain” would result in the consumer “incur[ring] a big burn penalty.”
Over $1 billion in ETH quickly trapped until FEI holders need to incur penalties.
When you’re holding FEI, you’ll be alright When you’re affected person.
However Solvency ≠ Liquidity https://t.co/xoae1sTE5f
— Ryan Watkins (@RyanWatkins_) April 3, 2021
Via a Twitter put up, Messari analysis analyst Ryan Watkins shared his ideas on the matter: “The problem with FEI proper now’s most individuals need to promote it again for ETH, however doing so incurs excessive penalties. Ultimately, FEI will re-weight to convey [itself] again to its peg, however then what? There’s little actual demand for FEI and most are nonetheless operating for the exits.”