FEI Risk Assessment
FEI is one of the few truly decentralized stablecoins, currently backed solely by ETH. Fei Protocol’s PCV holds $521MM of ETH, providing a 281% collateralization ratio for all circulating FEI. FEI’s total supply stands at 367MM with 182MM FEI controlled by the protocol and 185MM FEI in circulation, falling in the top 10 largest stablecoins by total supply.
While relatively new, the FEI protocol and community have made significant progress on the peg stabilization mechanisms. FEI remains one of the most liquid stablecoins, with $345MM in liquidity available on Uniswap v2. Current liquidity dynamics enable $1MM trades with <0.50bps slippage.
As Aave seeks to expand the numbers of assets supported in a safe manner, FEI has the potential to introduce new lending and borrowing activity to the protocol. As one of the largest decentralized stablecoins, FEI holders have been actively seeking yield opportunities. A FEI market on Aave establishes a robust credit market for FEI lenders and borrowers with the potential to bring new users to Aave.
Unique to FEI, the protocol manages a $521MM PCV. In the future, the FEI community can choose to allocate PCV resources toward Aave.
Smart Contract Risk - B
Fei completed its Genesis event on April 3, 2021, raising 639k ETH for the PCV. Fei has completed 2 audits with Open Zeppelin and Consensys Diligence. In the case of time sensitive issues, the Fei Guardian can pause the system - held by the Fei Core Team in a multisig with the intention of either renouncing the role or transitioning to a community held multi-sig, but has no mint/issue abilities. The Fei Guardian is currently controlled by the Fei team with plans to transition to a community multisig in the coming months. The Guardian can revoke any role from any contract, pause/unpause contracts, and force a reweight.
Counterparty Risk - C
FEI holders can sell FEI for ETH on DEXs or choose to redeem from the protocol at $0.95. FEI ownership remains highly concentrated on Uniswap, with 46.9% held in the Uniswap FEI-ETH pool and 44.8% held in the Uniswap FEI-TRIBE pool. 3,856 unique addresses hold FEI.
Market Risk - B+
FEI has become a top 10 stablecoin with a total supply of 367MM. With $345MM in liquidity, FEI can support multi-million dollar swaps with minimal slippage. Given the PCV, FEI maintains a stable base of liquidity for FEI holders in all market conditions, unlike other stablecoins dependent on individual LPs. This enables liquidators to have plenty of access to FEI liquidity when needed.
While FEI struggled to maintain its peg post-Genesis, the protocol made key changes to stabilize the peg, reducing volatility.
Also, Chainlink launched FEI-ETH and TRIBE-ETH price feeds.
Proposed Risk Parameters
- Strategy: rateStrategyStableTwo
- Base LTV As Collateral: 0
- Liquidation Threshold: 0
- Liquidation Bonus: 0
- Borrowing Enabled: true
- Stable BorrowRate Enabled: false
- Reserve Decimals: 18
- Reserve Factor: 2000
Rationale
By starting FEI at a 0% collateral factor, the stablecoin can only be supplied or borrowed - not used as collateral. This limits the risk for Aave lenders, given users cannot borrow against their FEI. Over time, the community can explore raising the collateral factor.
We welcome feedback on these parameters.
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