OpenZeppelin Consensys Diligence
OpenZeppelin Consensys Diligence
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Last updated: Dec 05, 2022
Fei Protocol is a decentralized stablecoin platform built on the Ethereum network. Its main product is an algorithmic stablecoin FEI which is powered by an innovative approach known as Protocol Controlled Value (PCV).
The protocol also pioneers in the relatively new field on the DeFi spectrum by providing Liquidity as a Service (LaaS) solutions for various DAOs across the Ethereum network.
Fei Protocol was founded in December 2020. The project attracted $19 million in investment from Andreessen Horowitz (a16z), Coinbase Ventures, Nascent, and Framework Ventures, among other investors.
To support its emphasis on decentralization the Fei Protocol launched its DAO from day one. The governance system is powered by the TRIBE token.
FEI stablecoin was named after an ancient stone currency called Rai, or Fei, that was used by the people of the Micronesian island of Yap.
FEI stablecoin aims to become a scalable alternative to highly centralized fiat-backed solutions such as Tether’s USDT or Circle’s USDC as well as to some cryptocurrency-backed options such as MakerDAO's DAI stablecoin that often cannot provide enough scalability due to its overcollateralized nature.
The protocol’s main product is the FEI coin which it calls a DeFi native stablecoin that is powered by an innovative concept of the Protocol Controlled Value. PCV accrues liquidity by minting FEI coins in exchange for ETH on the bonding curve. It means that users are buying FEI directly from the bonding curve using ether rather than borrowing stablecoins against collateral.
In its first implementation, Fei Protocol used so-called direct incentives and reweight mechanisms to boost up FEI usage. The idea was to have one exchange where trading activity of the stablecoin was incentivized, while the rewards and penalties system helped to ensure the price remained pegged.
At the launch, Uniswap became such an incentivized exchange where the initial FEI/ETH pool was created at genesis. During the IDO, users were able to buy FEI for ETH with a discount. While the Uniswap pool acted like a minting hub, other exchanges and secondary markets served as arbitrageurs to make sure the peg was maintained throughout the ecosystem. However, the initial approach failed in April 2021, leading FEI to fall in price way below its peg significantly. FEI stabilized its price later in May.
In December 2021, Fei Protocol was upgraded to v2, introducing some significant changes. Mainly, the upgrade brought a 1:1 redeemability of FEI, given each stablecoin may now be redeemed directly from PCV for both ETH and DAI at $1.
Fei v2 also introduced a pilot program for TRIBE buybacks designed to work along with Balancer v2 liquidity bootstrapping pools. The protocol will continuously auction newly minted FEI for TRIBE using excess funds from the PCV.
The protocol is deploying liquidity from PCV through partnerships to various decentralized protocols that allow earning yield for the community. PCV is also used in emergency situations: when the price of the stablecoin falls below the $1 target, Fei Protocol can use PCV liquidity to buy FEI on the open market and burn the purchased tokens to maintain the peg.
The main goal of the Fei Protocol app is to maintain the $1 peg of its stablecoin FEI no matter the scale of it. The token can be minted and redeemed for 1$ worth of collateral, and arbitrage opportunities ensure the peg is kept tight to its real world asset. The supported assets for minting FEI currently are DAI, ETH, and LUSD.
Since the Peg Stability Module (PSM) is tasked with helping the protocol maintain the peg at $1 the contract holds a reserve of assets in order to exchange FEI for other assets worth $1 with a fee. Fei Protocol allows two actions - minting, where users buy FEI for $1 plus a fee and redeeming, where they sell FEI for $1 worth of assets minus a fee. The Fei Protocol fees are variable and depend on market conditions.
At the time of writing, supported by Fei Protocol wallets are MetaMask, Coinbase Wallet and all wallets integrating the WalletConnect Protocol.
FEI is an algorithmic stablecoin with an uncapped supply that reflects demand. It enters circulation via sale along a bonding curve. This curve approaches and fixes at the $1 peg.
TRIBE is the governance token on the Fei protocol. It has a maximum supply of 1 billion tokens and is used to incentivize community members participating in the network.
Santoro is the author of Fei’s whitepaper and the current CEO at Fei Labs. Before this project, he worked as a software engineer at Okta Inc.
Montgomery is the current business lead at Fei Labs. Previously she worked in the same position at ConsenSys.
Delgado is listed as the third co-founder at Fei Labs. Prior to this, he worked as a software engineer at a DeFi project Dharma Labs, and Uber.
On April 28, 2022, Fei protocol lost around $80 million worth of digital assets through an exploit and offered the attacker a $10 million bounty to return the stolen funds. So far, there has been no answer from the hacker.
The vulnerability that made the Fei protocol hack possible is said to be a “typical reentrancy vulnerability” - a common problem among Ethereum-based smart contract dApps. After a series of transactions, the attacker took control of around $80 million wrapped Ethereum which they are still in the process of laundering through Tornado Cash.
In fact, the initial partnership with a Rari Capital lending protocol resulted in a proposed token merge that has yet to be approved by both DAO’s communities.
In collaboration with Ondo Finance, Fei Protocol is offering its Liquidity-as-a-Service (LaaS) product to help newly launched DeFi projects to increase their DEX liquidity. The first participants were Universal Market Access (UMA), Gro Protocol (GRO), and ShapeShift (FOX), NEAR (NEAR), and this list is expected to grow.
Since its v2 update, Fei Protocol has shared deep ties with Balancer, adding the protocol’s PCV liquidity to the AMM’s bootstrapping pools to earn yield for the community.
According to the protocol’s announcements, in the future Fei Protocol will support the creation of bonding curves denominated in any ERC20, instead of the initial bonding curve that was restricted to ether.
The next big thing for Fei is going to be a new model of algorithmic PCV management via a custom Investment Pool on Balancer v2. Currently, PCV holds six different assets, several of which are volatile. Fei is using algorithmic weight adjustments depending on the level of collateralization. According to the developers, “as the PCV moves down closer to 100% collateralized (high leverage), the risk curve would adjust PCV weights towards stable assets like DAI and RAI algorithmically.”
Fei Protocol is also devoted to further development of its LaaS partnerships connecting more DAOs and DEXes to the Fei growing ecosystem.
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