Correction of the crypto market on Wednesday put the FEI token for the Fei protocol heavy, the latest attempt to create a computationally stable currency that will remain stable in the face of market turmoil. Due to the proprietary mechanisms of the protocol, it was impossible to sell the FEI token as the Master Liquidity Group set a negative price for the token.
The Fei protocol is a recently launched project that instantly raised billions in cash, with the total value locked in by the sale of the FEI token, a computationally stable currency that uses the protocol’s controlled cost concept to maintain US dollar communications.
The decisive factor in the function of the protocol is the Uniswap FEI-ETH pool, which is largely controlled by the protocol. The pool is clearly designed to track the price of the USDC-ETH pool as much as possible. The protocol sends most of the Ether (ETH) it receives from the FEI buyer into the FEI-ETH incentive package, and ideally provides more liquidity to facilitate trading.
In order to maintain anchoring, the protocol limits the amount of sales that can take place through the incentive package. This is caused by the burning of a large proportion of FEI tokens used in sales, with the result that their actual price falls sharply. The burn-in penalty is equal to the square of the percentage distance to the FEI price from the wedge of $ 1 – to $ 0.90, the penalty is almost 100%. Ironically, several discrepancies result in a negative price, which means that FEI sellers have to pay ETH buyers for a “franchise” of FEI ownership. In practice, the swap transaction simply does not take place under these price conditions, and no one is allowed to sell FEI on this aggregator.
The situation was highlighted by Banteg, the main developer of Yearn.finance, which gave the FEI an effective price table for its set of incentives:
FEI Effective price. Source: Bunting
Another failed experiment or a temporary malfunction?
The extremely severe incineration penalty means that the project’s main liquidity pool, which contains more than $ 1 billion of protocol-controlled ether, cannot be sold to the FEI. The token currently has two main parallel markets: the Uniswap FEI-DAI pool and the MXC exchange. In the Dai basin, the FEI still trades at $ 0.76, but has only $ 11 million in total liquidity, while the MXC maintains $ 500,000 in liquidity in an area above $ 0.70. With 2.4 billion FEI tokens in circulation, only a fraction of today’s supply can be sold.
Fei Protocol has a number of strong supporters and advisers, including investors such as Andreessen Horowitz, Coinbase Ventures, Nascent Ventures, Framework Ventures and Buckley Ventures. Robert Lesnar, founder of Compound and Robot Ventures, is also a well-known supporter. He publicly promised to buy some amount from the FEI for $ 0.70, and to this day it seems that no one has accepted him along with the offer.
In an interview with Cointelegraph, Lesnar explained that the protocol is in limbo due to an error:
“Fei uses incentives to stay in touch, and imposes a penalty when users sell for less than a dollar and pay a discount when users buy Fei for less than a dollar. The purchase discount mechanism was disabled yesterday due to a security issue.” Fei is not currently working. ”
In fact, the protocol demonstrates a carrot and stick approach to maintaining the stick, with an additional FEI offer for traders who buy less than $ 1. Earlier on Wednesday, the group said they had disabled the gingerbread portion of the mechanism due to a security breach.
Take advantage of tips from conventional economics
Despite the apparent complexity, the phi mechanism is based on a principle similar to most fiat currencies, with central banks often using their own reserves of gold and foreign currency to maintain the value of the currency in times of strong selling pressure. Direct restrictions on sales are also not new: countries such as Lebanon, Venezuela and Turkey have given recent examples of introducing strict capital controls in an attempt to stabilize the value of their currencies.
Finally, the success of the reserve mechanism depends on the market’s general confidence in the currency. The Turkish government has almost emptied its reserves after many years of trying to stem the fall of the lira.
All in all, it seems that the owners are patient with Fey’s tight liquidity restrictions, the fact that the FEI trades relatively close to the dollar and no one takes Leschner for his proposal is a good sign of the project. Whether the test will succeed after the error is resolved is still an open question.