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Final Date01 Jan 1970
Time Left0 Days
Final Date01 Jan 1970
There are 2 assets in the FEI Protocol.
Tribe (TRIBE) is a governance token similar to MKR that provides support in bank panic situations.
FEI stablecoin. Fei can do pretty much whatever it wants with collateral assets (looks like a depositor-run bank). TRIBE and ETH provide the FEI peg to the dollar. Fei Protocol is built on the Ethereum cryptocurrency blockchain and TRIBE and FEI tokens are ERC-20 standard coins.
Fei can throw balance capital into lending protocols or staking pools throughout the DeFi ecosystem, or buy other reserves. This flexibility has created organic demand for its stablecoin and reduced reflexivity.
What requirements, from a user point of view, must a stablecoin satisfy in order to be perfect as a measure of value and as a store of value?
For a stablecoin, first of all, the stability of its value in relation to the value of its peg is necessary. Since the most common peg is $1, you can start from that.
A stablecoin should not require redundant collateral, especially if the user intends to use it as a store of value.The value stored in stablecoins should be controlled only by its owner.
Collateral transparency is also needed (whether or not the stablecoin is actually as collateralized as claimed by the issuer).
Currently, not a single stablecoin present in the crypto ecosystem meets all these requirements in the aggregate. Why the situation is like this is easy to understand if we analyze the existing projects, dividing them into two large groups according to the criterion of the stability of the security asset:
Stablecoins backed and pegged to stable assets.
Stablecoins backed by a volatile asset linked to a stable one.
The first group includes all fiat-backed stablecoins. They satisfy conditions A and B, but they do not satisfy condition C, since any balance of the address can be blocked if the issuer has reason to doubt the legitimacy of the origin of the funds. This means that if the user somehow got “dirty” stablecoins on the balance, he may lose the opportunity to manage his funds (what will happen next – whether he proves his innocence or not – does not matter for the purposes of this article).
The first group also includes all stablecoins backed by other stablecoins, i.e. algorithmic ones such as ESD, BAC, FRAX, etc. Regardless of whether they are only backed by a peg in a trading pair in the liquidity pool (ESD, BAC), or also in the smart contract itself (FRAX), all of them are not stable enough, and most importantly, they are simply not needed as stablecoins to store value. If there is an underlying USDC or DAI, why use a derivative of it? The purpose of their existence is yield farming, which is why no user in their right mind would use such stablecoins for long-term value preservation.
Unlike the stablecoins of the first group, which are backed by an initially stable asset, the stablecoins of the second group have volatile collateral, so achieving their stability relative to the peg is a much more difficult task than those listed above. To solve this problem, the most common solution is to overcollateralization.
This means that they are also not flawless for the user. A person who simply wants to keep part of his funds in such stablecoins buys them on the exchange, but never releases them himself in a smart contract. But even so, some of the weaknesses of overbacked stablecoins could jeopardize the safety of his funds.
With a long-term fall in the rate of the collateral asset (by several times), the supply of collateral vaults will be sold (they are always sold below the market in large packages, otherwise who would buy them if you can buy them on the market) and the volume of stablecoin money supply will shrink. Moreover, it can shrink to such volumes that it even grows in price above the peg at some point – funny, but not excluded.
As a result, the vaults may be empty before the money supply is completely burned, which means that the part remaining in circulation will have a value of zero. Or there will be an extreme liquidity shortage in circulation, and paradoxically, this may ultimately lead to an increase in the exchange rate, but vice versa, a decrease relative to the peg due to a low-liquid, unattractive asset.
All these, of course, are scenarios of an extremely exaggerated negative development of events; in reality, DeFi services are likely to take some steps to get out of the crisis. But, it is necessary to understand that all actions that go beyond the normal workflow of the system are a kind of “crutches”, the need for which shows that the system is imperfect.
The low popularity of crypto-backed stablecoins is also evidenced by the fact that currently 93% of the capitalization of all stablecoins is in fiat-backed stablecoins. Thus, achieving stabilization based on a volatile asset is not so difficult. And if this task is still somehow solved by the redundancy of the asset, then achieving stabilization with a security of 100% or even lower is a non-trivial task.
Fei Protocol tries to solve the problem of stability without redundant provisioning. For this, an approach is used that is different from the “lombard” approach, as in over-collateralized systems. Its essence is this:
Collateral (ETH) no longer remains the property of users pledged to the service, but becomes the property of the system when they issue stablecoins.This collateral, called Protocol Controlled Value (PCV), is used to create an ETH/FEI pair in the liquidity pool on Uniswap.
The FEI price in this pool is stabilized through a direct incentive mechanism consisting of bonuses for buying FEI above the peg price, which expands the money supply, and penalties for selling FEI below the peg price, which compresses the money supply. It would seem that the system should work as intended. Based on the fact that direct incentives are able to stabilize the price in any situation, at the start of the project, the release of coins was carried out with a significant discount for users.
When a person has the opportunity to buy some asset in order to subsequently sell it at a higher price and get a profit, he will do so. Usually the only difficulty associated with trading for him is where or when will the peak price of this asset be achieved. But here the developers presented users with a gift – it was known in advance that the price peak was $1 (or maybe $1.01 at best), because it is a stablecoin.
Naturally, all those who bought at a discount began to sell, and the price fell. Of course, a direct stimulus was included in the process, but not in the way expected. Instead of getting out of a critical situation, the stimulus eventually only aggravated it, and then completely led the state of affairs to zugzwang. There were difficulties when launching the project in the spring of 2021.
The FEI project was able to accumulate over 600,000 ETH ($1.3 billion at the time). The secret to this success is simple. The creators of the project proposed the so-called stable coin, when the cost of an altcoin is always equal to 1 US dollar.
Given the crisis of cryptocurrencies in 2017, such a proposal could not but arouse interest among investors, although it caused a mixed reaction among fans of decentralized blockchain. The fact is that such a rate is maintained due to the freezing of the reserve, and in the case when the coin costs less than 1 US dollar, the difference in cost is covered from the frozen reserve fund.
In addition, the developers distributed part of the TRIBE governance tokens among the first investors of the project. However, in the beginning it was possible to exchange FEI for TRIBE within the system itself. Given that the FEI rate was $1, and the TRIBE rate was $3.18 (at the start of trading) and $1.19 after the price fell, a unique situation was created.
The scheme looked like this:
A trader purchases FEI for $1.
Inside the wallet, it exchanges it for a TRIBE governance token worth $3.18.
Also working in the system, it changes the management token to ETH, without penalties, transfer fees, etc. and makes an outright profit.
Then, withdrawal of ETH into fiat money and repetition of the arbitrage operation happen.
If you take 100 US dollars, as an analogue of the conditional 100%, you can see an obvious profit. A trader buys 100 USD, 100 FEI coins and transfers them to his wallet. There, using the internal management interface, he exchanges 100 altcoins for 100 TRIBE management tokens at a price of 3 dollars 18 cents. In total, having invested only 100 bucks, he already has 318 dollars on his account or a profit of 218% per operation.
According to data leaked to open sources (social network Twıtter), due to such manipulations, an economic loss of 383 million US dollars was caused. It was for this amount that TRIBE management tokens were purchased. The project administration was forced to take urgent action. But the burden fell on the shoulders of altcoin holders.
Despite the difficulties, a total of 250 million TRIBE tokens (25% of the maximum supply) were sold in the seed round and in the public sale, on average, presumably at $0.007 apiece. The launch of the Fei Protocol project has been of great benefit in that it allows other projects to learn from the mistakes made.
Is It Worth Investing in Tribe?
The project has strong seed investors: Coinbase, a16z, Framework Ventures. Tribe also has a strong developer community that is in the top 5 most active on GitHub. Also, in addition to the Fei Protocol, the Rari Capital landing site is included in the TribeDAO ecosystem.