Earlier this Saturday, the FEI Protocol held the Genesis event, and over 639,000 Ether (around $ 1.3 billion) was successfully locked in commitment for stablecoin. Ethereum collected for the project will be used as collateral to print stablecoins using bonding curves to maintain a $ 1 fix. The FEI’s protocol mechanism also allows direct incentives that are “more efficient, fairly distributed and completely decentralized”. According to the project, more than 17,000 addresses attended the event, providing $ 2.6 billion of liquidity to Uniswap.
— Fei Labs (@feiprotocol) April 3, 2021
Potential Discussion for the FEI Mechanism
However, the project has already received criticism for its mechanisms. The FEI’s use of protocol controlled value (PCV) means that when users deposit collateral, their funds cannot be withdrawn immediately. This is because the capital is owned and managed by the protocol itself, making the capital more efficient and decentralized compared to other stablecoins.
The project initially allowed participating users to push the FEI for $ 0.50. This is a huge discount from the seemingly fixed price of $ 1. As the Ethereum bonding curve will grow with supply, many users predicted that the stablecoin will reach its fixed value after sufficient collateral has been deposited.
However, liquidity providers and short-term investors have said they cannot sell their FEIs for ETH without incurring huge losses in trade. This was because of the protocol’s direct incentive system, which uses a dynamic combustion system to fix the price of the stablecoin. According to the technical review of the protocol, “selling the FEI in a fast time frame during a period of high sales pressure” will result in a “serious burn penalty” of the user.
Over $1 billion in ETH temporarily trapped unless FEI holders want to incur penalties.
If you’re holding FEI, you’ll be alright If you’re patient.
But Solvency ≠ Liquidity https://t.co/xoae1sTE5f
— Ryan Watkins (@RyanWatkins_) April 3, 2021
Messari research analyst Ryan Watkins shared his thoughts on the matter in a Twitter post: “The problem with the FEI right now is that most people want to sell back for ETH, but doing so is causing extreme damage. Eventually, the FEI will put weight again to bring back its own nail, but then what? There is very little real demand for the FEI, and many are still struggling to exit. ”