Stablecoins and The FEI Protocol

Stablecoins seek to replicate the advantages of traditional, stable currencies via some form of digital money. This means that, in general, a stablecoin is a cryptocurrency collateralized by the value of a specified underlying asset.

In practice, stablecoins allow market participants to avoid the volatility of digital assets like Bitcoin and Ethereum (ETH) without converting to fiat currency. The ability to minimize volatility and move in and out of fiat is critical and thus stablecoins are becoming a large part of the decentralized financial ecosystem (DeFi).

FEI is a new algorithmic stablecoin that attempts to solve the problems that have plagued existing stablecoins thus far.

Investing in the TRIBE governance token which controls FEI via a Decentralized Autonomous Organization (DAO) which is similar to Compound may represent a compelling way to capitalize on the growth of stablecoins.  

Largest Stablecoins

Tether: lack of transparency; centralized single point of failure and control

USDC & Binance Coin: Centralized, controlled by a single entity

Dai: Decentralized, expensive b/c overcollateralized 150%, complex

Empty Dollar Set (EDS): decentralized, algorithmic, highly volatile

Dynamic Dollar Set (DDS): decentralized, algorithmic, highly volatile

The FEI Protocol

The Fei protocol issues the FEI stablecoin. This stablecoin has an uncapped supply that grows with demand. The FEI stablecoin will enter circulation via a bonding curve sale. The curve approaches and fixes at the one-dollar peg. The protocol will enable users to create bonding curves denominated in any ERC20 token eventually, but at launch only ETH can be used to purchase FEI.

The initial bootstrapping phase will last until 250 million FEI has been distributed via the ETH bonding curve. After this period known as “Scale”, the bonding curve price will fix at a governance determined buffer above the peg, thus creating a price ceiling for the FEI stablecoins.

Most DeFi platforms use a user owned Total Value Locked (TVL) model. This model often requires large rewards to incentivize users to keep their money in. There is always a risk of a large user pulling out and crashing the system and money leaving for greener pastures overtime.

Fei Protocol developed a Protocol Controlled Value (PCV) model to solve these issues. PCV is a subset of the concept of TVL, in which a platform outright owns the assets locked into the smart contracts. This allows more flexibility to direct capital as needed and better maintain the peg.

Fei Protocol also plans to implement “direct incentives” in which trading activity and usage of FEI are incentivized in such a way that traders naturally help drive FEI price back to its peg.

Coupled with the FEI stablecoin, the team will also launch a fully decentralized autonomous organization (DAO) from the get-go. The Fei Protocol DAO will be governed by holders of the TRIBE token. Token holders can vote to add new bonding curves, adjust price functions, and adjust the allocation of the PCV.

Key Terms:

  • Community/Team/Investors split is 80/15/5.
  • Community liquidity is instant. Investors have a linear time-lock. Team has back-weighted time-lock.
  • The majority of the TRIBE will be controlled by the DAO.
  • Genesis Group gets early access to the Initial DEX Offering. FEI earned in the Genesis Group can be converted to TRIBE before others bid the price up.

Reality Bites

There is a joke that goes something like…” when a Millennial and a Boomer complain about each other, they need to remember that there is a whole generation between them that hates them both.” Among many of my Gen X brethren, there is a sense that somehow we got screwed; in fact, we are sure of it, but many are not clear how that happened. I know. Let me explain, my slacker friends.
After World War II, a pack of rich white guys met at a hotel in Bretton Woods, New Hampshire, and decided how to split up the world while sipping on Canadian Club and water, no doubt.
The US agreed to be the world’s policeman; in exchange, the US dollar would be pegged to the price of gold, and every currency in the world would be pegged to the US dollar.
The system worked great through the ’50s and ’60s until the US started running significant deficits to fund the Vietnam War and the ever-growing need of the locust herd know as the Baby Boomers. So, right around my birth, in the early ’70s, “we” decided that this whole gold reserve business was too much trouble. Conveniently, Saudi Arabia was willing to tell the world it would only price oil in US dollars in exchange for us agreeing to kill all their Shiite enemies at any time with a phone call.
The world runs on oil, and if countries can only buy oil in dollars, it inevitably created a massive demand for dollars. To keep the Saudis happy and make Soviet (Russian) oil uncompetitive, a “strong dollar” became a bedrock policy. A strong dollar sounds good, but it also made US exports uncompetitive and turned towns like Detroit and Cleveland into bombed-out hell-holes. By the time my Gen X hit the labor market, banking, computers, or Applebee’s were the only choices. Making widgets or building a business other than in tech was a fantasy.
Of course, the US could have taken another path. We could have exercised some fiscal discipline around entitlements, trade or avoided Quixotic wars in the Middle East, but where is the fun in that?
Fast forward to today and advanced economy sovereign debt levels are the highest in 120 years. Historically, when debt gets crazy like it is now, there are only three ways out: default, which is never going to happen, financial repression or inflation, or a series of hyperinflations.
I am betting on the inflation scenario. We have already seen the money supply grow at 25%+ since COVID-19 hit, and my guess is we will see plenty more over the coming months and years.
Some investors seem to think that -1.1% real rates are the bottom. Luke Gromen has pointed out that real rates bottomed at -14% after WWII. So, buckle up, my Gen X friends. That cash you have set aside for college or perish the thought retirement! You are going to need a hell of a lot more of it. Is there a way out? Perhaps. I will give you a hint. Twenty-one million.

About

Starting in 1998, I have worked in the financial services industry. I cut my teeth at a large money center bank, followed by a large regional bank and an alternative asset management firm where I find myself today. Being a masochist of sorts, I also thought it would be fun to spend three years becoming a Chartered Financial Analyst (CFA), all while two toddlers occupied my house. In addition to gainful employment, I find the investment process fascinating. Success requires a weird mix of rational thought and awareness of human behavior. It also includes the bonus of great wealth if done correctly.

There is certainly no shortage of talented folks throughout the industry. At the core is an incentive structure that creates a “heads I win, tails you lose” paradigm and too much pressure to dance so long as the music is playing, as Citigroup CEO, Charles Prince, said just before the Great Financial Recession.

Like an invasive tumor, financial services has grown unabated and today comprises a much larger portion of U.S. GDP than it did in decades past. Much of that “domestic product” comes from intermediaries rent-seeking via fees of every description. Yet, in 2008, at the same time Wall Street was pushing the country almost to the point of a full-blown depression, a pseudonymous author named Satoshi Nakamoto published an eight-page paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” and the game changed forever. Thirteen years later, blockchain technology and decentralized finance (“Defi”) appear poised to flip the financial world on its head and re-plumb the entire system from front to back.

If this occurs, it will trigger the most significant wealth transfer event of our lifetimes as Millennials and those tech-savvy enough to “get it” capture billions of dollars in friction costs currently Hoovered up by the Wall Street fee machine. Like Amazon or Google before it, this new technology will benefit from network effects. Metcalfe’s Law states that a network’s value is proportional to the square of the number of connected users. The network effect ensures a Hunger Games, with a Power Law distribution among winners and losers.

An investor looking to navigate this landscape faces some unprecedented challenges and opportunities. As the world speeds up and access to information democratizes, the signal-to-noise ratio broke the meter some time ago. Access to information is no longer a competitive advantage. The ability to filter the wheat from the chafe and turn the grain into bread is the ballgame.

This blog is my attempt to do just that. It is an effort to sort through the lessons learned in commercial banking and private equity trenches. Incorporate the seemingly endless stream of books, articles, podcasts, and CNBC white noise in search of a coherent, actionable investment philosophy. I have chosen to focus mainly on blockchain technology’s disruptive impact for two reasons. First, particular aspects of financial services are within my “circle of competence,’ and second, I believe that the blockchain and Bitcoin, in particular, represent the most asymmetric risk/reward investment opportunity that will likely occur in my lifetime.