Fei Protocol

What is Fei USD (FEI)?

Fei USD is an algorithmic cryptocurrency pegged to the U.S. dollar, exploiting the stablecoin niche between centralized (custodial) and overcollateralized, decentralized stablecoins.

The Fei protocol is designed to be fully decentralized but also more capital efficient, using value locked in it to maintain the liquidity of secondary markets and earn yield.

Capital efficiency is where Fei USD looks to differentiate itself from other decentralized stablecoins, many of which are overcollaterialized and therefore perceived as potentially inefficient.

As a stablecoin, Fei plays a crucial role in the cryptocurrency industry by giving traders a safe haven in times of volatility. Since most cryptocurrencies tend to be priced in U.S. dollars, dollar stablecoins are a go-to during bearish times.

Allied to this is the fact that stablecoins are also cryptocurrencies and benefit from the fast, even instant settlement inherent to crypto. Rather than waiting days for fiat dollars to settle, traders can swing from crypto to stablecoin and back into crypto in minutes without relying on margin.

Fei USD positions itself as “the stablecoin for DeFi,” with its scalable, decentralized protocol managed fully by algorithmic control of assets.

When Was Fei USD Launched?

Fei USD was founded in late 2020 to considerable interest, attracting $19 million of early investment from venture capitalists. Participating firms included Nascent, Coinbase Ventures, Framework Ventures, and the practically omnipresent Andreessen Horowitz (also known as a16z).

During its launch phase in early 2021, supporters were able to buy tokens at a discounted price of as low as $0.50. Following this discount phase, users were able to invest $1.01 worth of ETH to issue $1.00 worth of FEI. This allowed the protocol to build up sizable ETH reserves.

Who are the Founders of Fei USD?

Fei protocol was founded by Joey Santoro, Brianna Montgomery, and Sebastian Delgado.

Santoro, who serves as CEO of Fei Labs, is a Duke graduate in computer science. He was previously a software engineer at Okta Inc, a company helping businesses manage digital identities.

Montgomery, a magna cum laude graduate of the University of North Carolina, is the project’s business lead. She has significant experience in the role, having worked in tech firms like nCino, DefenseStorm, and Coriant, as well as blockchain studio ConsenSys.

Delgado, formerly a software engineer at Dharma Labs and Uber, is a UC Berkeley graduate with degrees in cognitive science and computer science.

How Does Fei USD Work?

The Fei project uses ETH to form an FEI/ETH liquidity pool on Uniswap, providing the Fei USD stablecoin coin with a liquid secondary market. The Fei protocol itself is the main liquidity provider in this pool.

The FEI token’s supply is controlled by smart contracts responsible for minting and burning the FEI token according to bonding curves and trade incentives.

The ETH bonding curve has a target supply of 250 million FEI set as a bootstrap target, known as “scale,” where FEI’s price stabilizes at $1.

This $1 peg is maintained by direct incentives as well as a key element of the Fei protocol known as Protocol Controlled Value (PCV). Direct incentives incentivize the usage and trading activity of the FEI token.

Direct incentives act as a price stability mechanism as well, burning a portion of FEI that holders sell when its price drops below $1. When FEI goes above $1, however, arbitrage trading brings it back down.

PCV, meanwhile, is an alternative to the standard TVL (Total Value Locked) model used by many stablecoins.

PCV versus TVL

Many stablecoin projects give users a form of IOU for deposits made to the protocol, and these funds can be withdrawn outside of lockup periods at any time. Projects that use this mechanism tend to rely on token distribution rewards to ensure that capital remains locked up.

In Fei’s PCV model, though, the Fei protocol retains user-deposited funds permanently. The protocol takes deposited ETH and locks it in Uniswap’s FEI/ETH liquidity pool.

If FEI deviates below a certain threshold, PCV withdraws 99% of the protocol’s liquidity from the pool to purchase FEI, restoring the price. The remainder will be resupplied, with excess FEI being burned.

If FEI deviates above the same threshold, PCV determines the difference between current and target prices and prints additional FEI. This increase in supply brings the FEI price back into equilibrium.

What Makes Fei USD Unique?

Aside from the unique, albeit complex, mechanism of PCV and direct incentives to maintain its peg, Fei USD is also unique because of how it manages to stay decentralized while also avoiding the capital inefficiency of overcollateralization.

In fact, the Fei protocol is governed by TRIBE, the governance token of its DAO (decentralized autonomous organization) structure.

The Fei protocol also provides guaranteed liquidity, given that it’s funded by the FEI yield curve and traded on a decentralized exchange using the FEI/ETH liquidity pool. This means that users don’t need an individual counterparty to make a trade. Instead, they simply trade against the pool as a whole.

The fact that its entire protocol is rooted in decentralized finance is the reason Fei is often referred to as a “native DeFi stablecoin.”

How is the Fei USD Network Secured?

FEI is an ERC-20 token deployed on Ethereum and involved in decentralized finance within the Ethereum ecosystem. As such, it is secured by the Ethereum blockchain.

As of September 2022, Ethereum is a proof-of-stake (PoS) blockchain. PoS relies on validators staking capital in the form of ETH into an Ethereum smart contract. This staked deposit then acts as a collateral if the validating node misbehaves or doesn’t fulfill its duties as per the network protocol.

On the Ethereum blockchain, validators have to stake a minimum of 32 ETH into the deposit contract. Given this level of capital expenditure for just a single validator out of hundreds of thousands, Ethereum makes attacks on the protocol prohibitively expensive to attempt.

What is the Use of FEI?

FEI is primarily a U.S. dollar stablecoin. While it differentiates itself from most other stablecoins by how it functions, its function remains largely the same as the rest.

Fei USD is pegged to the U.S. dollar. It gives cryptocurrency traders an alternative to the frequent volatility experienced by even the most highly capitalized cryptocurrencies like BTC.

Given that many investors price cryptocurrencies in dollar terms, this lack of short-term volatility makes stablecoins like FEI useful for exchange and value transfer.

Unlike fiat currencies, stablecoins are borderless and can be transferred to any other compatible wallet address anywhere in the world, settling almost instantly. No banks or other financial intermediaries are involved in the process at all.

Instant settlement on the blockchain also allows traders to execute trades in a more agile manner. They can trade from FEI into various cryptocurrencies and back into FEI many times in a short period, and the assets actually settle. This isn’t possible with traditional trading, with fiat currencies and most assets taking days for final settlement.

Who Controls Fei USD?

Fei functions like a decentralized autonomous organization, and this DAO is governed by the TRIBE token.

The TRIBE governance token has a supply of 1 billion, and its holders can vote on the Fei protocol’s governance proposals. As a bonus, TRIBE holders can earn a share of transaction fees by staking to the FEI/TRIBE liquidity pool on Uniswap.

How Much Is FEI In Circulation?

FEI has a circulating supply dictated by its protocol without defined minimums and maximums. Its current circulating supply is over 424 million FEI.

Return curves define the circulating supply of FEI and help peg the price of FEI to $1. When demand for FEI increases, users can repurchase it on the bonding curve.

The FEI protocol supports the creation of new bonding curves, but its primary bonding curve is denominated in ETH. In its secondary PCV market, users can trade back into ETH.

How Do You Buy FEI?

As a native DeFi token, FEI is easy to buy on various decentralized exchange platforms in the Ethereum ecosystem. DEX platforms like Uniswap, 1INCH, and Ox all provide users with the ability to trade FEI.

Of course, it is also easy to buy or sell FEI via its own protocol by simply accessing the Fei protocol website. It is most commonly paired with ETH, but pairs against coins like USDT are also available.

It’s also possible to purchase FEI on centralized exchange platforms such as Gate.io, MEXC, and Phemex.

Is It Possible to Buy Fei USD Instantly?

Buying FEI on centralized exchanges tends to be instant because they are custodial, and a purchase does not actually result in settlement. You own an entitlement to FEI when you buy on an exchange—you don’t actually have the FEI tokens in your wallet.

That only happens right after you buy FEI on a DEX. For the most part, decentralized exchanges are non-custodial. This means that whatever you buy is actually sent to your wallet address with transactions that are verifiable on the blockchain.

Settlement (or finality) on the blockchain depends on which blockchain you use and how congested it is. Main layer ETH transactions can take a few minutes, but if a layer 2 network is being used by your DEX of choice, transactions will only take seconds.

How Do You Store FEI?

FEI, as an ERC-20 token, can be stored in an Ethereum-compatible wallet. One of the most popular Ethereum wallets is Metamask. It comes as an extension for browsers like Brave, Chrome, and Firefox, and connects easily to decentralized apps (dApps), including DEXes.

However, Metamask and similar wallets are hot wallets. They can be compromised if, for example, you connect them to the wrong website. For this reason, some crypto users prefer cold wallets, which don’t connect to the internet.

Fei USD Energy Consumption

FEI is deployed on Ethereum and doesn’t have its own blockchain. This makes it just one of the many dApps and token systems that Ethereum plays host to.

Even better, Ethereum’s own energy consumption has decreased dramatically. In September 2022, Ethereum went from the more intensive and computing-dependent proof-of-work (PoW) to the energy-efficient and incentive-based system of proof-of-stake (PoS).

Estimates suggest that Ethereum’s energy consumption has reduced by as much as 99.95% following its PoS “merge.”

Is FEI a Good Investment?

FEI is pegged to the U.S. dollar and, in the best case, is only as good of an investment as the dollar is. That isn’t to be underestimated, given that the dollar is currently the world’s reserve currency and macroeconomic conditions can see other currencies fall relative to the dollar.

This phenomenon is especially stark given that hyperinflation can leave other currencies wretched even in comparison to the dollar. As such, the dollar is often regarded as a short-term safe haven.

Of course, over the long term, even the dollar has suffered from massive depreciation thanks to the policies of central bankers. As per FRED data, the median house price in the USA in Q1 1963 was just $17,800. In Q1 2022, the median house cost $433,100, showing how far the dollar has fallen.

This inevitable long-term depreciation and various other shorter-term risks faced by the dollar also threaten its derivatives. FEI, therefore, faces all of the risks the dollar does, as well as the additional risks to its own protocol.

As such, FEI isn’t often viewed as an investment in and of itself. Rather, it is a medium of exchange unrestricted by borders and banks. It is also a medium for traders to execute their strategies on-chain with infinitely more flexibility and the immutable settlement of blockchain.