This article is reproduced from Babbitt Chain Ventures, the original author: Brianna Montgomery, co-founder of Fei Protocol.

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

direct incentives

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

Direct Motivation is a powerful and amazing tool that you must deeply understand

Direct incentives are a new mode of DeFi. For example, the Uniswap interface may display: the price of selling FEI is $0.98, but since this price deviates from the peg exchange rate, selling FEI at this time will burn an additional 4 % of the FEI stable currency, then the actual price after the transaction becomes $0.94. (Learn more: Uniswap Incentive Sell/Burn). Note that users cannot view the burned amount through the Uniswap interface, but when executing transactions, the burned part will be regarded as slippage. Therefore, Uniswap’s slippage parameter settings can indirectly prevent accidental large-scale burning. Once the protocol is live, participants can access the transaction interface of the Fei protocol application to determine any burns or rewards that may be imposed on their transactions.

We recommend participants use the Fei protocol app to trade between the ETH-FEI asset pair to view the incentive amount.

Note that the burning penalty can be quite severe. When the price of Fei 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 periods of high selling pressure, you There may be severe burning penalties, and the purpose of FEI's stabilization mechanism is to encourage long-term holding.

In other respects, the direct incentives are only applicable to the specific Uniswap ETH-FEI trading pair, and the trading pairs and transfer behavior of all other exchanges behave as normal.

collateral risk

At launch, the Fei Protocol will only use ETH as a reserve currency. This design decision is made due to Fei Protocol's core purpose of decentralization. However, fluctuations in the price of ETH can lead to poor collateralization ratios.

The white paper discusses the conditions under which collateral ratios will continue to increase or decrease due to selling pressure. In short, if demand falls faster than the amount of burn captured by direct incentives, the Fei protocol will reduce staking during that time. By buying and burning FEI using Protocol Control Value (PCV), Reweights will step in to restore the price of Fei. In the event of a severe crisis, Fei DAO may need to step in to restore a healthy collateralization ratio by minting TRIBE tokens to burn FEI and recapitalize.

"If the value of ETH falls sharply and rapidly, the system may struggle to function properly."

If this happens, Fei DAO can take measures to diversify PCV by connecting to the bonding curve of stable decentralized assets such as DAI and RAI. In addition, the Fei Protocol can also generate additional collateral buffer through Yearn and lending market investment yield-generating opportunities.

contract risk

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

In addition, ConsenSys Diligence conducted a secondary audit of the key contract components of the Fei protocol (ConsenSys Diligence Audit Report)

According to Fei Labs, the team has made some changes to the protocol after receiving the audit report. These changes include switching from the staking contract written by the Fei core development team to the battle-tested Synthetix StakingRewards contract. Simplicity and security are important, and these changes are considered relatively low-risk, but are still reviewed by independent security engineers.

Nevertheless, the audit does not guarantee that the code is free of any bugs 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 vulnerability reports.

In the event of a serious vulnerability report, the Guardian can suspend any risky contract without a time lock. After the suspension, any fixes and functional changes must be voted on and approved by the DAO. A few months after a successful launch and protocol stabilization, Guardian will transition to a community-held multi-signature wallet.