Fei Protocol supports the creation of a decentralized, scalable and fair stablecoin based on Ethereum. There is no cap on the supply of FEI stablecoins, demand can be tracked, and sales enter circulation along the binding curve. The price function will initially reward early adopters who purchase FEI at a low price. Its mission is to create a fully decentralized stablecoin. This is the stance the development team would like the governance community to uphold in the future.
The FEI stablecoin has an uncapped supply that tracks demand, which enters circulation through a bond curve sale that approaches and is fixed at a $1 peg. When new FEI needs arise, users can purchase them on the bonding curve. The price function will start rewarding early adopters who buy FEI at low prices. The Fei protocol will support the creation of bonding curves in any ERC20 token, but will only include a single curve denominated in ETH when it goes live.
The mission of the Fei protocol is to create a fully decentralized stablecoin, therefore, it is crucial that tokens issued by trusted third parties (e.g. USDC, USDT, wBTC) will not use As collateral on the bonding curve, this is a position that the development team wants to be shared by the governance community after launch.
The ETH bonding curve will have a target FEI supply for bootstrapping until the price is fixed at $1. This goal is called "Scale", and reaching "Scale" indicates the end of the bootstrapping phase. According to the introduction, "Scale" will be set to 250,000,000 FEI. After the “Scale” phase is complete, the bond curve price will be fixed in a governable buffer above the anchor price. This price creates a limit throughout the ecosystem that arbitrageurs can buy on the bonding curve and sell on the secondary market if prices are higher elsewhere.
It is important to note that users cannot sell FEI on the bonding curve, instead, the protocol keeps incoming ETH as the protocol control value (PCV). Fei Protocol deploys PCV to create a liquid secondary market where users can sell FEI back for ETH. We will explore how PCV supports the FEI ecosystem below.
The Fei protocol is an ideal application for generalized PCV, with bonding curves and other incentives to fund PCV pools. It first allocates 100% PCV of the ETH bond curve financing to the Uniswap pool with ETH/FEI assets. The development team chose Uniswap because of its low threshold and high familiarity with ordinary DeFi users. Governance can redistribute PCV to other platforms in the future if the use case is clear. This approach has two key advantages over relying on stability mechanisms provided by external liquidity:
Assured liquidity, FEI holders can rest assured knowing that no whales can siphon off the protocol possessed liquidity. It is funded by the bonding curve and put into the Uniswap ETH/FEI asset pair.
Peg Reweights — If the price is below the peg price for a long time, the Fei protocol can rebase the Uniswap price back to the peg price. It does this by performing the following atomic transactions: (1) withdraw all protocol-owned liquidity, (2) buy FEI with the proposed ETH, bringing its price back to the peg (3) replenish the remaining PCV as liquidity ( 4) Burn the excess FEI. Any keeper can trigger peg repricing when prices are low for a period of time. The protocol rewards liquidators (keepers) through FEI minting incentives.
PCV rescales the FEI/ETH Uniswap pool to peg the price
With governance, the future use cases of PCV can be more creative. The protocol can maintain a collateral balance in a lending platform such as Aave. It can then adjust interest rates in the FEI market by offering and borrowing FEI tokens, and so on.
