Tokenomics 101: Fei and The TRIBE

Algorithmic stable coins have been a “pie in the sky” for crypto developers for many years now, some have come and failed like “TITAN and Empty Set Dollar” while others have succeeded like UST/Terra and FEI. But what exactly is FEI and how does one go about designing an algorithmic stablecoin?

FEI is a decentralized scalable and Defi-Native stablecoin protocol built on the Ethereum blockchain and ETH layer 2s; built by Defi for Defi. FEI is a 1 to $1 stable coin pegged to the US dollar providing redeemability for FEI using “protocol controlled value” (PCV). PCV is another way to say “treasury”, it is all the assets held by Fei Protocol. The aim of the FEI token is to propose a balance between the models of overcollateralized decentralized stable coins (like DAI) and centralized custodial stable coins (USDC, Tether). FEI uses the value it controls to maintain secondary markets and earn yield for the protocol through a variety of decentralized mechanisms.

FEI has two tokens associated with the protocol: FEI (stable coin) and TRIBE (governance token). TRIBE DAO (Decentralized Autonomous Organization) is a partial moderator for FEI protocol and governance for FEI is being migrated over to the DAO over time with the final goal of becoming fully decentralized.

You might remember the FEI launch if you were on Twitter or involved in the crypto space back in December of 2021, the protocol lost its peg at launch and was the object of great scorn from the crypto sphere for a few weeks, let’s dive in and see why early FEI minters got REKT!

History of FEI Version 1 (The good, the bad, and the REKT)

What happened when FEI V1 was Launched? During the token genesis, users were able to mint FEI with ETH along a discount curve (the more money put into the protocol the less of a reward was given to early stakers. When a user did this they were also then eligible for the airdrop of “TRIBE” the governance token of FEI protocol. Over 17,000 unique wallets signed up for the genesis event. The entire sum of the PCV at genesis was used to build initial liquidity on Uniswap (the largest pool allocation in Uniswap history).

Fei loses its Peg at Launch

The peg was lost at genesis mostly due to a “pre-swap” option that allowed token holders to swap FEI tokens for TRIBE upon launch, this created lots of selling pressure against FEI. The protocol is set up to punish sellers of FEI and reward those who buy it whenever FEI loses its peg. In this instance the swap pair ‘FEI-TRIBE’’ represented 98% of the liquidity for TRIBE; users who were selling FEI for TRIBE were forced to take the punishment for selling FEI as they were routed through the FEI-ETH pair, they could also lose more value from slippage due to the lower liquidity in the TRIBE-ETH Pool. Essentially FEI was being sold on both sides of the equation causing immense selling pressure and causing the peg to destabilize.

How Fei is Minted

The FEI stablecoin has an uncapped supply that tracks demand. FEI enters circulation when a user deposits funds (ETH at genesis) into the protocol controlled value (PCV) and is then rewarded with 1 FEI per $1 of ETH. Now that the initial sale is over FEI is minted at a 1 FEI for $1 of DAI, ETH or LUSD.

The launch contained only a single curve denominated in ETH. The vision for FEI is to create an entirely decentralized stable coin, so no centrally backed coins were allowed to be used in the initial bonding such as USDC or wBTC.

Peg Reweights

In the event of extended periods below the peg, the Fei Protocol can reweight the Uniswap price back to the peg. It achieves this by executing the following atomic trade: 1. Withdraw all protocol owned liquidity, 2. Buy FEI with the withdrawn ETH to bring the price up to peg. 3. Resupply remaining PCV as liquidity. 4. Burn the excess FEI. Any keeper can trigger a peg reweight when the price has been low for a certain period. The protocol rewards keepers with a FEI mint incentive.

*Source: “Fei Lite Paper”

 

 

Direct Incentives

A direct incentive stablecoin is one in which both the trading activity and usage of the stablecoin are incentivized, where rewards and penalties drive the price towards the peg. In general, this would include at least one incentivized exchange acting as a hub. All other exchanges and secondary markets can arbitrage with the incentivized exchanges. This helps maintain the peg throughout the ecosystem.

Fei Protocol achieves this goal by incentivizing Uniswap trading volume with mints and burns. These incentives apply directly to the trader’s balance, in proportion to the distance from the peg. This means that a larger sale incurs a larger burn. The protocol incentivizes traders via mint to return the price back up to the peg. The formulas used to ensure that all volatility below the peg is net deflationary. This will help bring the supply down to the right level of demand.

Incentives Mechanism
Fei Price
Fei Price

 

What can we learn from FEI V1:

  1. Initial minting Mechanism: Fei was offering a 50% discount on the initial mint with murky limits and invited a large amount of mercenary capital (the goal was to raise 250 million; the actual initial mint amount was 1.2 Billion). This caused an intense amount of selling at launch.
  2. Direct Incentives: This mechanism caused sellers at prices below the peg to be penalized even more causing a bank run as the news spread.
  3. Liquidity Pool Routing: ETH/FEI and TRIBE/FEI were the two Uniswap pools at launch, between sellers exiting FEI for ETH and Buyers exiting FEI for TRIBE the selling pressure on FEI was enormous on launch, the peg mechanism of PCV was not enough to stop the price decline causing a cascade of negative incentives that penalized everyone in the system.

FEI had to spend weeks revamping the system to get the peg back to stable and the protocol took a large reputational hit as weeks went by with the peg below $1.

How did FEI fix the issue?

Tokenomics of FEI V2

FEI’s tokenomics is all about price stability and the protocols ability to maintain the price of FEI at $1, to accomplish this goal FEI uses three methods to backstop the peg:

  1. Balancer and FUSE Algorithmic Investment Pool Management
  2. 1–1 Redeemability with PCV treasury
  3. TRIBE Backstop
 

Algorithmic Investment Pool Management:

 

Collateralization Ratio

The higher the collateralization ratio goes the more risky and yield bearing positions can be taken by the treasury; the inverse is as the collateralization ratio gets closer to 100% the protocol reweights the treasury into stable assets and positions with little to no volatility. By being in stable assets it ensures FEI will maintain its peg and keep the protocol solvent. You can see the current mix of PCV here: https://app.fei.money/

Redeemability 1–1

You can exchange a FEI token for $1 of PCV, meaning if FEI is trading at $0.90 you can still burn that 1 FEI token back to the treasury for $1 of DAI, ETH, or other assets controlled by the protocol (below is a graph of Current asset mix of the Protocol Controlled Liquidity). This system ensures arbitrage will re-stabilize the peg based on the value proposition (you can make money burning Fei below $1 for DAI or ETH).

Below is the current asset mix of the protocol controlled liquidity:

 

 

TRIBE Backstop

Tribe backstop is a profit-sharing and backstop mechanism for Fei; in V2 a mechanism was added that mints Tribe and is sold for Fei as soon as the collateralization rate drops below 100%. This mechanism is in addition to normal reserve stabilization that sells PCV for FEI when the Fei price dips below the threshold set by governance and offers another layer of protection.

In return for the added risk TRIBE holders face with this backstop method TRIBE would earn a percentage of the PCV equity (PCV value — user circulating FEI) each month via buybacks, as compensation for bearing the risk of inflation in the event of under collateralization. FEI would be minted to buy TRIBE off of the most liquid AMM (currently the FEI-TRIBE Uniswap V2 LP pool) and distribute back via staking rewards. A portion of this TRIBE would go back to the DAO treasury, which could be used to pay for development, liquidity incentives, or as a buffer against inflation.

The rationale behind using PCV equity is that TRIBE should only receive rewards for being overcollateralized, thus in turn incentivizing risk management and a longer time horizon.

Likewise only distributing a percentage as opposed to 100% of the equity will maintain a healthy PCV buffer to absorb volatility without inflating TRIBE.

For example, if the PCV equity is 500m and the distribution rate is 5%, then 25m FEI would be minted over the course of the year to buy TRIBE and distribute back to stakers.

Tokenomics of TRIBE

TRIBE Distribution and Unlocks:

TRIBE Distribution
Vesting Schedule

TRIBE allocations at launch gave just 13% to the team and 5% to early investors. Tribe tokens sent to investors and the team have a long vesting period with the core team on a five-year time lock (tokens are back weighted, team members receive each of the tokens in distributions of: 10%, 15%, 20%, 25%, and 30% respectively over the five year period); core team investors at a 4-year lock. These allocation percentages are in line with other projects and meet the guidelines for standard token distribution ratios. The initial token allocation that was earmarked for “IDO” (Initial Dex offering) was used to seed the initial FEI/TRIBE pool on Uniswap to create liquidity for the token to be swapped with FEI; now TRIBE is available on many AMMs and DEXs. This mix of liquidity for the genesis group, grants, and treasury along with the longer lock period for investors shows TRIBE DAO is long term focused and plans to stick around and continue to work on the project.

TRIBE by the Numbers

 

The governance model of the TRIBE DAO allows users to vote on a variety of issues facing the DAO, such as when to release more TRIBE tokens, where to direct the PCV (treasury), and what assets to support with funding. With the token supply currently hovering close to 50% of the total supply unlocked the treasury holds a large amount of the TRIBE token. TRIBE token holders can propose and then vote on when to release more tokens from the treasury in times of instability of the FEI peg (to sell TRIBE to buy and backstop the peg of FEI), to create grants for internal or external teams, for token swaps with other protocols, or to provide liquidity for a new pool or swap pair that contains TRIBE.

Below is a wrap-up diagram of TRIBE’s tokenomics:


Liquidity

Liquidity for TRIBE is deep on multiple FUSE pools, Balancer, Sushiswap, and Uniswap with swap pairs available on a wide variety of assets. TRIBE is also available on Binance, Coinbase, Hobi, KuCoin, and other CEX/DEX platforms.

Newest Features of TRIBE DAO and FEI Protocol

Tribe Turbo: Tribe Turbo is a cost-effective way to bootstrap liquidity by allowing a Defi token to become a productive asset by sharing in the yield generated from a FEI credit line at essentially no cost.

 

LaaS (Liquidity as a Service with ONDO Finance)

Fei Protocol partnered with Ondo finance in October of 2021 to offer LaaS to create AMM (automatic market maker) pairs for other token projects. With the LaaS model DAO’s can bootstrap liquidity for a swap pair as soon as they launch and with no upfront costs or terms once the token has achieved deep enough liquidity on one or multiple AMMs they can redeem the vault and close out the service. The vaults are a structured financial product that allows different parties to take on different levels of risk within the strategy. Approved projects can deposit their project token into an Ondo liquidity vault with a flexible duration, and Fei Protocol will match their deposit with an equivalent amount of FEI. The tokens are deployed as liquidity onto DEXs, such as Uniswap or SushiSwap

This arrangement provides immediate liquidity, and essentially doubles the liquidity (for example: 5M supplied by ABC DAO + 5M FEI). Double the liquidity means a healthier market with less slippage for users interested in buying the token. After a predetermined duration, the Ondo vault returns all remaining FEI to Fei Protocol plus a small fixed fee, and returns all remaining project tokens back to the project. The project keeps trading fees and assumes any impermanent loss. LaaS can be a source of revenue for DAOs, rather than a sunk cost. Even with negative price action, LaaS can still cost less than traditional liquidity mining incentives

Currently to create a pool for a DAO or protocol a token must be sold from the treasury to create the pair. An incentivized offer must be made to attract enough liquidity to create the pair; this issue often leads to mercenary capital coming in for the high rewards and leaving when the rewards dry up. The other issue DAOs or protocol treasuries face is impermanent loss and opportunity cost for use of the treasury, Laas with Ondo vaults solve this dilemma for new DAOs.

Closing thoughts

FEI Protocol and TRIBE DAO had a rocky start, but thanks to the perseverance and ingenuity of the team and community the project has a promising future. Thanks to the new products like “liquidity as a service” and “Tribe Turbo” FEI’s PCV looks to continue to grow into the future as more DAOs and new token offerings begin to utilize these services and team up with FEI to build new liquidity pools and AMM pairs to create mutual value across the DeFi space. With the Tribal council and buyback features of TRIBE we could see a token with increasing value for years to come with TRIBE and a truly decentralized stable coin with FEI.