Fei protocol is a collateralized stablecoin pegged to the US dollar managed by a DAO governance structure. Fei raised 639,000 ETH ($1.3 billion) from its Genesis event on March 31, 2021. The stablecoin (FEI) experienced a bumpy launch after losing its peg to the US dollar one month after launch. However, after a series of protocol updates, FEI has recovered its peg and has been stable ever since. FEI V2 is a significant protocol update that will be launching in 2022.
Authors: Valentin Kalinov, Christian Viehof
We can say that there are four main categories of stablecoins:
1. Tokenized Currencies (e.g., Tether)
2. Off-Chain Collateralized Stablecoins (e.g., Digix Gold)
3. On-Chain Collateralized Stablecoins (e.g., Dai)
4. Algorithmic Stablecoins (e.g., FRAX)
The stablecoin space’s experimentation and innovation levels are high, especially in the last two categories. FEI does not entirely fit in any of the categories mentioned above. What makes FEI different from other stablecoins is the mechanism of maintaining its peg to the US dollar. The Protocol utilizes a system of bonding curves and Protocol Controlled Value (PCV) to support its peg. On the one hand, we could say that the coin uses on-chain collateral to maintain its peg, and on the other hand, it is partially algorithmic by utilizing Balancer pools for its PCV. Today, the size of the PCV is close to $700 million, and it is a mix of decentralized assets (e.g., ETH) and stablecoins (e.g., DAI). Fei Protocol intends to reduce its reliance on stablecoins in the future.
Figure 1: Fei’s Protocol Controlled Value (PCV) (Source: https://app.fei.money/analytics)
FEI is in the process of moving to V2 of its protocol; therefore, I will be focusing on its V2 properties:
FEI, alongside OlympusDAO, was one of the first protocols to introduce the idea of Protocol Controlled Value in the DeFi space, and it is the first PCV-controlled stablecoin. Bonding curves control the issuance of FEI by minting FEI in exchange for PCV at an oracle-determined ETH exchange rate. The bonding curve awards early adopters by offering better exchange rates. Any ERC-20 token can be used for PCV by issuing a bonding curve denominated in that asset. It only needs to be approved by the DAO (TRIBE token holders). Once issued, FEI can be redeemed 1:1 for PCV reserves. The PCV acts as collateral for the FEI stablecoin. The goal is to stay above 100% collateralization ratio. If the PCV ever dips below the target reserve ratio, TRIBE becomes mintable in exchange for FEI. This is called a TRIBE backstop. The backstop is the only time TRIBE absorbs volatility on the downside; thus, TRIBE coin holders will have skin in the game. Protocol equity comes from yield and appreciation of the PCV and will be partially allocated toward TRIBE buybacks as a risk-reward. All the PCV risk, liquidity, and yield will be controlled via Balancer Investment Pools. If, for example, the value of the volatile assets (e.g., ETH) in the PCV drops significantly, the Balancer pool would adjust PCV weights towards stable assets like DAI.
The Fei DAO aims to become fully decentralized. The TRIBE token holders are responsible for all critical decisions, from voting on bonding curve parameters to adjusting the PCV allocations. As mentioned before, TRIBE tokens are the backstop of the protocol becoming undercollateralized. Therefore holders are regularly rewarded through buybacks. Fei DAO is exploring the option of Optimistic Approvals where a committee gets appointed which makes decisions on the protocol upgrades. There is a time lock during which the DAO token holders can veto the committee. This way, people would only be required to participate in the DAO if they disagreed with the decisions, significantly reducing the time spent on DAO voting from each member.
Fei Protocol is looking to branch into different service offerings by utilizing its PCV holdings. One such service is the Liquidity as a service (LaaS) which is primarily aimed at other DAOs. A big challenge when launching a DAO is to provide liquidity for the DAOs native token. This is where the Fei Protocol comes into play. Projects can deposit their native token into a liquidity pool (LP), and Fei would match their deposit with an equivalent amount of FEI tokens. The token pair then gets deployed as liquidity on decentralized exchanges. LaaS doubles the liquidity of the DAOs token
Economic Purpose (EEP): FEI is listed as a fiat-pegged payment token (EEP21PP01USD) similar to the other stablecoins in the industry.
Industry Type (EIN): The issuer of FEI is active in the field of Payment Services and Infrastructure (EIN06PS).
Technological Setup (TTS): FEI is an Ethereum ERC-20 Standard Token (TTS42ET01). The Class “Ethereum ERC-20 Standard Token” captures every token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.
Legal Clam (LLC): The FEI token does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. FEI is built by Fei Labs, its Issuer Type is a Private Sector Legal Entity (LIT61PV).
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The FEI token qualifies as a Non-Authorized Significant E-Money Token (REU51EM12) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
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Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via valentin.kalinov@itsa.global and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via christian.viehof@itsa.global and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open ques
