FEI Comparison. Malt vs FEI
For anyone following the algo stablecoin space you will know how much of a stir the launch of FEI caused. It is one of the most well funded defi projects to ever launch, raising over $1 Billion over their genesis group launch. So what was it about the FEI protocol that people seemed to love so much and how does it compare to Malt?
There are a lot of similarities between FEI and Malt in the way they approach the algorithmic stablecoin problems. Namely, they both have a form of protocol controlled value (PCV), a mechanism to mint and sell tokens above peg and a way of incentivising buying below peg.
However, there are also many differences in our approaches. This article will explore some of the similarities and differences between our protocols, and highlight some points where we believe Malt may have an edge.
Above Peg
The easiest parts of these protocols to compare are the above peg mechanisms.
FEI
- Users can mint FEI on a bonding curve with a max price of $1.01. This creates an arbitrage opportunity whenever the market price of FEI drifts above peg. Anyone can mint on the bonding curve and sell at a higher price bringing the price back down.
Malt
- The Malt protocol also captures this arbitrage. But instead of offering it to anyone it executes the entire arbitrage itself. The profits generated are then distributed to bonded liquidity providers.
These mechanisms are very similar, but approached from different angles.
We think the Malt mechanism is fairer as it democratizes the arbitrage profits across all LPs. In contrast, the FEI mechanism will concentrate profits towards the fastest bots. Unlike with FEI, anyone who stakes LP on Malt will be capturing some of this arbitrage profit, whether they know how to code a bot or not.
Below Peg
Below peg things look a little different, although in essence the mechanisms aren’t as different as they may seem.
FEI
- Users are incentivized to buy FEI by being given an additional premium on their purchase. The amount of FEI given increases the further from peg FEI moves.
- Users are disincentivized to sell because any selling below peg is taxed.
- Because FEI controls most of the liquidity it can rebalance the pool as a final backstop.
Malt
- Arbitrage auctions allow users to provide capital to the protocol, which is then used to buy and burn Malt. These users are rewarded with an additional premium. The amount of premium increases directly as a function of demand, as measured by time.
- The protocol’s liquidity extension is used to bolster auction participation and ensure meaningful supply contraction.
The FEI mechanism is kind of an implicit dutch auction as opposed to the explicit auction that Malt has. As the price of FEI drops and/or the time under peg increases the premium given to buyers goes up. This allows the market to price the premium.
Malt uses an explicit dutch auction which allows the premium to be priced external to the market price of Malt, while still allowing the premium to be dynamically determined by market forces.
A big problem that algo stablecoins face below peg is how to create meaningful supply contraction. FEI achieves this by taxing sellers. The tax levied to the sellers is higher than the reward given to buyers and that difference creates supply contraction.
The problem with this is that selling is something that happens in the normal function of a stablecoin, and punishing sellers with a tax won’t cultivate a good relationship with the users. This also punishes investment into other cryptocurrencies, which is not the point of a stablecoin.
A further issue is that the tax necessarily has to rise when buyers are unwilling to accept the current premium. This creates an adversarial situation between different users of the protocol who are not strictly aligned.
Malt is able to incentivize buyers with a dynamic premium that is decided outside of the AMM pool. We use an explicit auction backed up by the protocol-controlled liquidity extension. This achieves a meaningful supply contraction without taxing any of our sellers.
Another crucial benefit of the Malt system is that the speed at which the premium increases is not set by governance. Instead, it reacts dynamically due to the liquidity extension. The auction is always 30 minutes long, however the minimum price of the auction is set dynamically based on current market price and the state of the protocol’s liquidity extension.
Take for example a dutch auction with a minimum price of $0.80 vs an auction with a minimum price of $0.50. Both auctions last 30 minutes, meaning the premium grows faster in the auction that needs to move from $1 to $0.50 over 30 minutes than the auction that only needs to move between $1 and $0.80.
When there is lower demand for the successive auctions the protocol will try to increase its reserve ratio. This increase in reserve ratio will reduce the minimum price of the next auction.
In this way, the Malt protocol will speed up the progression of the allowed premium dynamically based on how the market is responding to the auctions. Returning to the example from earlier, because the lower (in this case $0.50) minimum price is determined in response to low auction participation, this further facilitates a market-determined premium while actually increasing the reserve ratio.
Profiting from speculation
How can end users speculate and profit on coins in either of these stablecoins? Speculators are an important part of any crypto ecosystem.
If an algo stablecoin can align the incentives of speculators with stability of the protocol, there is a much greater chance of finding stability over time.
The consequences of the opposite idea can be seen in projects like ESD where speculators had to sell all their rewards in order to realise the profit they had made. This inevitably drives the price away from stability.
So how do FEI and Malt stack up when looking at the incentives for speculators?
FEI
- Users can buy FEI under peg and receive the premium.
- Users can carry out the arbitrage above peg by minting on the bonding curve.
- Users can speculate on the price of the governance token TRIBE.
For a speculator to realise their under peg premium from FEI they will have to sell that additional FEI. This again misaligns speculators and the protocol. The speculator’s natural behaviour will push the price below $1 when they try to realise their profit.
The above peg arbitrage in FEI strongly favors bots which removes the ability to profit for a large chunk of users in the ecosystem.
Simply holding TRIBE in expectation of price increase does not provide any value to the ecosystem, since TRIBE holders do not have to participate in governance.
MALT
- Users can stake their LP and receive a pro-rata portion of the above peg arbitrage profit.
- Users can buy Arb tokens in the arbitrage auction and receive the premium.
Speculators using either form of profit generation receive rewards in a non-native token. Even better, they are able to choose which token to be paid in by participating in the LP or auctions for the AMM pool of their desired token pair. Paying speculators in a different coin means they do not need to sell Malt to realise their profits. This innovative approach greatly relieves selling pressure.
As mentioned previously, the above peg arbitrage is also democratized across all LPs, regardless of their ability to write a highly optimized arb bot.
Conclusion
We believe FEI offers a good solution to the algo stablecoin problem that is likely to succeed, and we respect the strength and innovation of their mechanisms.
Still, Malt offers a unique approach and goes much further to align incentives, to reward its supporters and make an ally of its sellers. The speculator’s desire for profit works for the Malt stabilizing mechanism, not against it — this, combined with our other highly reliable features, gives us confidence in the success of Malt.
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