Fei Labs has been able to successfully raise $1.3 billion in Ethereum (ETH) for the genesis launch of Fei Stablecoin. The contributors counted upto 17,000. An explicit instance of the market’s rising support for digital assets and decentralized finance.
On April 3, as announced by Fei, a total of 639,000 ETH was locked in the minting of the stablecoin, which went up to $1 billion in its conclusion, marking the raise as one of the biggest DeFi launches of all time as per speculators.
The Fei stablecoin is generated from the bonding curve, a mathematical formula for defining the relationship between price and token supply, where the participants will receive an incentive. It is partially backed by Ethereum. For the genesis event to begin, the protocol allowed users to mint FEI from the ETH bonding curve at a discount of $0.50. The deposit of the collateral will make the stablecoin reach its decided peg at $1.
The funds will be used to restart Fei’s Protocol Controlled Value, or PCV, which determines the total value locked. PCV describes all assets that can’t be redeemed by the users, that includes treasuries and insurance funds. Over $1 billion in Ethereum was locked up due to these protocol mechanics. The Fei Protocol Genesis was launched on March 31 and concluded on April 3. For preventing the easy liquidation, users had to deposit collateral, where the capital is owned and managed by the protocol, making it more decentralized than other stablecoins such as Tether, USDC etc.
Fei Labs said:
Users that participate at Fei Protocol Genesis can commit ETH as part of the Genesis Group to bootstrap the protocol. By doing so, this entitles participants to a pro-rata percentage of FEI generated from the bonding curve.
Fei Labs noted an interesting activity in its Twitter feed, where they observed that the FEI-to-ETH trading pair was the largest pool on Uniswap on April 3, up to $385 million FEI for TRIBE, a governance token, “probably marks the largest ever AMM swap”.
On April 1 protocol co-founder Sebastian Delgado tweeted:
Even though the launch proved to be highly successful, but it somehow didn’t work for the liquidity providers. The protocol introduced a stablecoin with the underlying protocol that is partially backed by Ethereum. The stablecoin will also be check upon on the bonding curves that will come with direct incentive in order to maintain the correct peg. On the condition that the price fluctuations moving away from the peg will be penalized while the ones moving towards the peg will be rewarded. This was done to maintain the circulation of the stablecoin. However it bacame a problem for liquidity providers as they had to face penalties for removing liquidity.
The issue with FEI right now is most people want to sell it back for ETH, but doing so incurs extreme penalties. Eventually, Fei will re-weight to bring FEI back to its peg, but then what? There’s little real demand for FEI and most are still running for the exits.
However, penalties for removing liquidity are related to the direct incentives mechanism as going by PCV. As per the researcher’s explanation on the protocol:
This means if you need to sell FEI in a quick time frame during a period of high sell pressure, you could incur a significant burn penalty. FEI’s stability mechanisms are geared towards long-term holding. I imagine many people who participated in the offering got caught off guard by this inability to redeem FEI for its collateral.
By April 4, the supply of FEI surged to 2.5 billion further after $1 billion in ETH had entered the protocol. The ones who have invested in FEI will have to hold it until it returns to its peg. Watkins also observed that the launch pushed Uniswap (where the FEI/ETH pair was traded) liquidity as high as $8 billion.