Fei Protocol will be launched soon. You must understand the three risks

FEI is a highly scalable, decentralized and reserve-backed stablecoin. It is designed to meet the needs of DeFi without relying on centralized asset collateral. As for the upcoming Fei Protocol’s founding phase, we hope that the community can decide whether to participate after being fully familiar with the protocol’s working methods and related risks.

Direct incentives

The Fei protocol uses direct incentives to punish transactions that deviate from the anchor price and reward transactions that move closer to the anchor price. The result is deflation, which helps to adjust the supply of FEI.

Direct incentive is a new model of DeFi. For example, the interface of Uniswap may display: the price of selling FEI is 0.98 US dollars, but because this price deviates from the anchor exchange rate, selling FEI at this time will burn additional 4 % FEI stablecoin, then the actual price after the transaction becomes 0.94 US dollars. (Learn more: Uniswap Incentive Sell/Burn). Note that users cannot check the amount of burning through the Uniswap interface, but when executing transactions, the burned part will be regarded as slippage. Therefore, Uniswap’s slippage parameter setting can indirectly prevent accidental large-scale burning. Once the agreement is online, participants can access the trading interface of the Fei agreement application to determine any burning or rewards that may have caused their transactions.

We recommend that participants use the Fei protocol application to trade between ETH-FEI asset pairs to view the incentive amount.

Note that the burning penalty may be quite serious. When the Fei price deviates from the anchor price by 10%, selling Fei will result in a burning ratio of up to 100%. This means that if you want to sell FEI quickly during high selling pressure, you May suffer severe burn penalties, the purpose of FEI’s stabilization mechanism is to encourage long-term holdings.

In other respects, direct incentive measures are only applicable to specific Uniswap ETH-FEI trading pairs, and trading pairs and transfer behaviors of all other exchanges are normal behaviors.

Collateral risk

At the time of launch, the Fei protocol will only use ETH as the reserve currency. The reason for adopting this design decision lies in the core purpose of the Fei protocol for decentralization. However, fluctuations in the price of ETH may lead to poor mortgage ratios.

The white paper discusses the conditions under which the collateral ratio will continue to increase or decrease due to selling pressure. In short, if demand drops faster than the amount of burn captured by direct incentives, the Fei protocol will reduce mortgages during this time. By using Protocol Control Value (PCV) to purchase and burn FEI, Reweights will step in to restore Fei’s price. In the event of a serious crisis, Fei DAO may need to step in to restore a healthy mortgage ratio by minting TRIBE tokens, burning FEI and recapitalizing.

“If the value of ETH falls sharply and rapidly, the system may be difficult to operate normally.”

If this situation is encountered, Fei DAO can take measures to diversify PCV by connecting to the joint curve of stable decentralized assets such as DAI and RAI. In addition, the Fei agreement can also generate income opportunities through Yearn and loan market investments, thereby creating additional mortgage buffers.

Contract risk

OpenZeppelin has completed a 12-person-week audit of the Fei protocol (OpenZeppelin audit report). The report mentioned that it found 5 serious problems and 3 high-risk problems, and Fei Labs officially stated that it has completed the repair.

In addition, ConsenSys Diligence also conducted a second audit on the key contract components of the Fei agreement (ConsenSys Diligence Audit Report)

According to Fei Labs, the team has made some changes to the agreement after receiving the audit report. These changes include the conversion from the staking contract written by the Fei core development team to the field-tested Synthetix StakingRewards contract. The changes implemented are related to the agreement. Simplicity and safety are important. These changes are considered relatively low risk, but they are still reviewed by independent safety engineers.

Nevertheless, the audit does not guarantee that the code is free of errors and vulnerabilities. Fei Labs officially stated that it will provide a bug bounty of up to one million dollars to encourage white hats to submit bug reports.

In the event of a serious vulnerability report, the Guardian can suspend any risk contract that has no time to lock in. After the suspension, any repairs and functional changes must be voted and approved by the DAO. A few months after the successful launch and the stabilization of the agreement, the Guardian will transition to a multi-signature wallet held by the community.

Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.