Introducing Fei Protocol

Fei Labs
Fei Protocol
Published in
10 min readJan 11, 2021


The elegance of DeFi is the ability to offer the best possible financial solution in every category. But users today are forced to choose between frustrating options when looking for a decentralized stablecoin. On one side, there are bloated, debt-fueled overcollateralized stablecoins that cannot scale to meet demand. On the other are algorithmic stablecoins that fuel volatility and continuously centralize rewards in the hands of the earliest holders. To truly build DeFi’s vision of global interoperable financial access, there needs to be a decentralized, fair, liquid, and scalable stablecoin that exhibits a high fidelity peg.

Enter Fei Protocol.

The Inspiration for Fei

Stablecoins are a staple of DeFi. Users want to access dapps like Compound and Aave without worrying about volatility. However, each existing stablecoin model has a critical fault. Fiat-collateralized stablecoins like USDC and USDT are centrally controlled. This represents a regulatory risk and a point of failure for apps wishing to be truly decentralized. Crypto-collateralized stablecoins like DAI have scalability issues due to capital inefficiency. In other words, generating crypto-collateralized stablecoins requires an excess of collateral. They also require demand for debt or leverage to grow. Seigniorage models like ESD and Basis Cash centralize supply expansion rewards. This creates an unfair distribution in the growth of the stablecoin. In addition, liquidity providers are incentivized to withdraw at the first sign of danger.

Fei Protocol was born in an attempt to solve all these issues. The inspiration for the vision of Fei Protocol comes from an ancient stone currency — Rai, or Fei, of the Micronesian island of Yap. We hope that the FEI stablecoin exhibits the same stability, simplicity, and ubiquity as its stone counterpart.

How FEI Supply Expands

The FEI stablecoin has an uncapped supply that tracks demand. FEI enters circulation via sale along a bonding curve. This curve approaches and fixes at the $1 peg. When new demand for FEI arises, users can acquire it by buying on the bonding curve. The price function will start low to reward early adopters for purchasing FEI. Fei Protocol will support the creation of bonding curves denominated in any ERC20. The launch will contain only a single curve denominated in ETH.

The mission of Fei Protocol is to create an entirely decentralized stablecoin. Therefore it is critical that no tokens issued by trusted third-parties (e.g. USDC, USDT, wBTC) be used as collateral on the bonding curve. This is a stance the development team hopes will be shared by the governance community post-launch.

The ETH bonding curve will have a target FEI supply for bootstrapping before fixing the price at $1. This target is known as Scale; reaching Scale will denote the end of the bootstrapping phase. Scale will be set to 250,000,000 FEI, to be large enough to merit integration with other DeFi protocols. We also believe it is small enough to hit within a short time frame to minimize the bootstrap period. Post-Scale, the bonding curve price will fix at a governance-able buffer above the peg. This price creates a ceiling throughout the ecosystem. Arbitrageurs can buy on the bonding curve and sell on secondary markets if the price is higher elsewhere.

Users cannot sell FEI on the bonding curve. Instead, the protocol retains the incoming ETH as Protocol Controlled Value (PCV). Fei Protocol deploys the PCV to create a liquid secondary market where users can sell FEI back into ETH. We will explore below how PCV supports the FEI ecosystem.

Protocol Controlled Value

Most DeFi platforms use a user-owned Total Value Locked (TVL) model. In these platforms, users receive an IOU and can withdraw assets at any time; lockups are increasingly common. Protocols can incentivize TVL via token distribution rewards. While this can lead to massive amounts of capital, it also creates the problem of mercenary capital: when liquidity is incentivized, DeFi platforms need to inflate and offer heavy rewards to maintain it. Deposited capital is then only loyal as long as the rewards are active. This is not sustainable long term as shiny new yield opportunities arise daily. There is a constant fear of rug-pulling when the rewards dry up and capital moves elsewhere.

Fei Protocol developed a Protocol Controlled Value (PCV) model to solve these issues. PCV is a subset of the concept of TVL, in which a platform outright owns the assets locked into the smart contracts. This is a stronger use case than the IOU common to most TVL applications, as the PCV is permanent. PCV gives the protocol more flexibility to engage in activities that are not profit-oriented. These activities can align with more fundamental goals, such as maintaining stability in the peg. As we have defined it, common use cases such as governance treasuries and insurance funds are types of PCV. Other possibilities include guaranteed liquidity or a price backstop for DeFi users. Unlike the IOU model, PCV is irrevocable. Governance tokens in a PCV platform accrue deeper value capture and corresponding responsibility.

User Controlled TVL approach vs a PCV approach to collateralization

Fei Protocol is the ideal application for generalized PCV. Bonding curves and other incentives fund a PCV pool that is approximately as large as the entire user circulating amount of FEI. It will initially allocate 100% of the PCV funded by the ETH bonding curve to a Uniswap pool denominated in ETH/FEI. The development team chose Uniswap due to the lower barrier to entry and higher level of familiarity for the average DeFi user. While Balancer and other alternatives have great value propositions, we feel that Uniswap is the right approach for v1. Governance can reallocate PCV to other platforms in the future if the use case is clear. The protocol mints and owns the FEI needed for this liquidity. This additional protocol-owned FEI is paired with each unit of FEI bought by users on the bonding curve. Therefore, the depth of this market liquidity should be on par with the total remaining circulating FEI. This approach has two key advantages over stability mechanisms that rely on external liquidity provision:

  1. Guaranteed Liquidity — FEI holders can rest easy knowing that no whale can pull out the protocol owned liquidity. It is funded by the bonding curve and put into the Uniswap ETH/FEI pair.
  2. Peg Reweights — In the event of extended periods below the peg, the Fei Protocol can reweight the Uniswap price back to the peg. It achieves this by executing the following atomic trade: 1. Withdraw all protocol owned liquidity, 2. Buy FEI with the withdrawn ETH to bring price up to peg. 3. Resupply remaining PCV as liquidity. 4. Burn the excess FEI. Any keeper can trigger a peg reweight when the price has been low for a certain period. The protocol rewards keepers with a FEI mint incentive.
PCV reweights of FEI/ETH Uniswap pool to peg price

Through governance, future use cases for PCV can be even more creative. The protocol can maintain a collateral balance in a lending platform such as Aave. It can then adjust interest rates in the FEI market by supplying and borrowing FEI tokens. Fei Protocol can even maintain balances in governance tokens of integrating platforms. It can leverage these tokens to contribute to the governance process throughout the ecosystem.

Bonding curve purchase of FEI with ETH PCV deployment

Direct Incentives

FEI is stabilized by a new mechanism we call Direct Incentives.

From the Fei Protocol white paper:

A direct incentive stablecoin is one in which both the trading activity and usage of the stablecoin are incentivized, where rewards and penalties drive the price towards the peg. In general this would include at least one incentivized exchange acting as a hub. All other exchanges and secondary markets can arbitrage with the incentivized exchanges. This helps maintain the peg throughout the ecosystem.

Fei Protocol achieves this goal by incentivizing Uniswap trading volume with mints and burns. These incentives apply directly to the trader’s balance, in proportion to the distance from the peg. This means that a larger sell incurs a larger burn. The protocol incentivizes traders via mint to return the price back up to the peg. The formulas used ensure that all volatility below the peg is net deflationary. This will help bring the supply down to the right level relative to the current demand.

Direct incentives to maintain peg price on incentivized exchange

The incentives only apply to trades when the spot price is below the peg. The side above the peg is taken care of by the arbitrage loop with the bonding curve.

Arbitrage loop maintaining price above peg

The direct incentive implementation of Fei Protocol is like a cousin of rebasing tokens (e.g. AMPL and YAM). It does directly operate on user balances, but only those of the users who actively engage in the incentivized behaviors. This has nice game theoretic properties when coupled with the protocol reweight price backstop. In the event of high FEI sell pressure, the sellers incur the associated deflation costs. Holders can rest confidently in the protocol backstopping the price if no trader restores the price. The long term ability to backstop is assisted by the deflation. These novel properties lead to a high fidelity peg for FEI.

Summary of the FEI peg maintenance dynamics and where they kick in

TRIBE and Fei Protocol Governance

Fei Protocol will launch with a fully decentralized DAO on day one. The TRIBE token controls the DAO. TRIBE holders can vote on the following actions among others:

  • Adding new bonding curves in new tokens or adjusting price functions of existing curve(s)
  • Adjusting the allocation of PCV for new incoming funding or existing PCV

The Fei Protocol DAO will be both powerful and governance-minimized. FEI stability does not require any active intervention by governance. The development team encourages mechanisms that are autonomous and algorithmic over those that are rigid and reliant on governance. We believe this governance-minimized approach creates a more predictable and efficient system.

The protocol allocates a portion of the TRIBE token to a FEI staking pool. Users can deposit FEI and receive a pro-rata percentage of the TRIBE drip into the pool. The development team and investors retain another portion. A percentage will be split between the Genesis Group and Initial DeFi Offering we discuss below. The remaining TRIBE stays in a treasury controlled by governance.

Genesis Group and Initial DeFi Offering

The earliest portion of the bonding curve will offer attractive prices for FEI. To mitigate frontrunning and unequal early distributions, Fei Protocol will include a “Genesis Period.” The Genesis Period will be a time period of 2–3 days in which early adopters can pool their ETH. This group will be known as the Genesis Group. Members of the Genesis Group earn a shared pro-rata percentage of the first bonding curve transaction. This is similar to the Hegic IBCO. Using this approach, access to the earliest FEI on the bonding curve will be open to all with equal opportunity. As an additional reward, the Genesis Group earns 10% of the total TRIBE supply pro-rata.

The Genesis Group completion will kick off an Initial DeFi Offering of the TRIBE token. The listing will be on Uniswap, denominated in FEI and TRIBE. The FEI for the IDO is minted by the protocol. The circulating FEI and TRIBE from the Genesis Group can be used in the IDO for efficient price discovery. The fully diluted valuation of TRIBE will be set to the same value as the amount of ETH raised in the Genesis Group. The Uniswap liquidity tokens for this IDO will be stored in a development fund. It will have linear vesting over 4 years to guarantee the liquidity for a sufficient period. The IDO allows for open price discovery and access to TRIBE immediately at the close of the Genesis Period.

As we get closer to launch later in Q1 2021, we will release more details on how to participate in the Genesis Group!

FEI and the Future of Stablecoins

As discussed above, the FEI Protocol has key advantages over existing stablecoin models. These advantages can allow it to become a core decentralized stablecoin in DeFi. It is designed to have irrevocable and deep liquidity, and strong mechanisms for maintaining the peg. All deflation costs are offloaded to traders selling below the peg, so holders can be confident in the long term $1 price. The funding controlled as PCV by the protocol is deployed to benefit the FEI ecosystem, not locked in a vault. The Genesis Group and Initial DeFi Offering allow for broad and fair access to TRIBE. All the benefits of inflation are socialized rather than centralized in the hands of an equity minority. We believe FEI presents a strong value proposition over alternative stablecoins, namely decentralization, capital efficiency, and fair supply expansion distribution. We are excited to share the Fei Protocol with the DeFi community.

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Fei Labs
Fei Protocol

A decentralized, fair, liquid, and scalable stablecoin platform. Powered by Protocol Controlled Value