DEFI

Spartan Group Partner Bullish on Fei Protocol Keeping Up with DeFi 2.0

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Spartan Group Partner Bullish on Fei Protocol Keeping Up with DeFi 2.0

In April 2021, Fei Protocol, an algorithmic stablecoin project with a high-profile investor lineup, launched. After raising a staggering 639,000 ETH, the project encountered difficulties as the excessive supply in the genesis plan caused the FEI stablecoin price to deviate from its intended peg of $1, leaving many bewildered.

Spartan Group General Partners Bullish on Fei Protocol

As a TRIBE holder, why am I excited about Liquidity-as-a-Service (LaaS) and protocol-controlled value (PCV) in Fei Protocol?

The most important thing about stablecoins is stability, followed by liquidity. FEI is not only a stablecoin but also the best stablecoin for liquidity in Uniswap v2.

The reason for such liquidity is that it adopts protocol-controlled value (PCV), which means the protocol "owns" its own Total Value Locked (TVL) and provides liquidity to itself. This is a concept supported by Fei Protocol, later followed by OlympusDAO with a similar idea.

Fei Protocol has its own TVL, rather than a TVL that is purely for profit. When you stop paying out millions of dollars in minting rewards in a day, traders will leave your protocol. It does this by:

  • You deposit 1 ETH
  • The protocol gives you FEI stablecoins worth 1 ETH

Then, Fei Protocol can freely use the ETH. Currently, its primary use is for protocol liquidity, which also explains why FEI is one of the largest liquidity pools on Uniswap v2.

Next, Fei Protocol takes the ETH and does whatever they want with it. Currently, it mainly provides liquidity for its own protocol, explaining why FEI has become the most liquid stablecoin on Uni v2.

But what if the collateral is reckless and not as supportive of FEI as Maker? What really supports the value of a stablecoin?

Currently, FEI is overcollateralized, but it has had a complex design in the past, including incentives when below the peg, and rebalancing in Uniswap pools. And as you remember, it didn't work.

After completing the largest DeFi auction in history, FEI experienced a dramatic price dislocation.

What many people didn't notice is that FEI later recovered its normal peg in May and has since maintained it. It achieved this by removing complex mechanisms and allowing the protocol to be liquidated through a simple minting tax model.

However, for me, using FEI as a stablecoin may be the least exciting aspect of the project.

Its truly novel idea is Liquidity-as-a-Service (LaaS), which is the core of "DeFi 2.0".

Remember earlier when I mentioned that Fei Protocol provides liquidity for itself through PCV? What if it does the same for other protocols?

Fei Protocol + OndoFinance allows new projects to provide liquidity for their tokens by simply depositing their tokens into a liquidity pool. Fei Protocol will use FEI to provide the other half of the tokens in the pool and bear the temporary loss of the project's Impermanent Loss (IL).

Compared to protocols that maintain the capital pool intact or pay out liquidity mining rewards to trading firms, this method is 2-10 times more capital efficient. It seems that some projects understand Fei Protocol's DAO-to-DAO aspect.

There are also other "DeFi 2.0" protocols that do not use liquidity mining to increase capital efficiency. Based on a simple and universal TVL evaluation, here is the market's valuation of TRIBE.

Many people no longer trust TVL, and rightly so; it is a flawed metric.

When @dcfgod asked this question, we found that compared to the treasuries of other DeFi projects, TRIBE's Price-Book Ratio (P/B) was underestimated.

This is because, excluding any liabilities, Fei Protocol has $900 million in deployable funds held by FEI users in circulation. So, what will it do with this money? One thing it is doing is activating a $170 million TRIBE token buyback.

Other potential use cases that excite me include:

  • Treasury coin redemptions currently in progress with BAL
  • 5% used for Fei Protocol Ecosystem Fund
  • Rapid growth of DAO-to-DAO integrations through governance mining as seen in the following
    @JacobPPhillips article

Over time, I believe TRIBE will not only reflect the adoption of FEI but also as buybacks depend on protocol equity and more DAOs integrate deeply with Fei Protocol, TRIBE could become a benchmark for DAOs.

Finally, I am bullish on two things:

First, this project has survived catastrophic events and is now thriving; second, the dynamic founders will continue to try new things. Both @Joey_Santoro and his team meet these criteria, and I am excited to see the future of this project.