Raising 639,000 ETH, how can the Fei Protocol break the negative cycle after being hit by a "freeloading whale"?
Source: The DeFi Way
Original Title: " Raising 639,000 ETH, Phenomenal DeFi Project FEI Targeted by "Freeloading Whale" Manipulation "
Author: Overnight Congee
At 3:00 a.m. Beijing time on April 4, the decentralized stablecoin protocol FEI completed its 3-day Genesis Group phase. It is reported that this event raised a total of 639,000 ETH and minted 1.3 billion FEI tokens, bringing over $26 billion in liquidity to Uniswap. In terms of data, FEI's popularity has far exceeded the imagination of most people, propelling it to become the largest algorithmic stablecoin project to date.
The reason why the FEI protocol attracted so much funding and attention undoubtedly lies in its rule design and the involvement of investment institutions.
As per the design, the Genesis Group phase would allocate nearly equivalent Fei tokens to participants who deposited ETH and proportionally distribute the protocol's governance token TRIBE (10% of the total supply). During the Genesis Group phase, participants could also choose to pre-swap their acquired Fei for the governance token TRIBE. The higher the overall pre-swap ratio of the participants, the higher the price at the IDO, leading to the so-called "freeloading arbitrage" opportunity.
Following a $19 million funding round from top-tier investment institutions such as A16z, Coinbase Ventures, Framework, etc. (receiving a 5% share of TRIBE governance tokens), FEI's protocol garnered increasing attention.
A few days ago, many, including the author, conservatively predicted that the FEI protocol would attract 100,000-200,000 ETH during the Genesis Group phase. However, under the guidance of industry leaders like SBF and their "freeloading tutorial," the FOMO sentiment surrounding the FEI protocol was completely ignited.
"Freeloading Whale" VS "All-In Whale"
Design rule-wise, theoretically Speaking, Whale participants (those involved with more than 1000 ETH) would theoretically opt to go more towards "freeloading" participation, but the actual participation is a bit more complicated, according to statistics from duneanalytics.com. Among the top 70 whales (with over 1000 ETH invested) by amount participated, 15 whales opted for a full allocation (pre-swap ratio reaching 100%), accounting for 21.42% of participants, with the largest whale participant investing a full 9999 ETH (equivalent to $20.5 million).
(Data Source: https://duneanalytics.com/tm1296/fei-eth-locked)
On the other hand, freeloading whales amounted to 42 participants (60%), following a principle of minimizing risk to only gain the Genesis Group phase airdrop reward.
The remaining 13 whale participants (18.57%) more or less pre-swapped a certain proportion of TRIBE governance tokens, with the top participant investing 10,031.88 ETH and pre-swapping 5530 ETH.
As of now, most "freeloading whales" have converted the received TRIBE governance tokens to Fei, with only a few successfully front-running the exchange into ETH. The majority of "freeloading whales" are trapped in Fei's "cage" due to the FEI protocol's "burn" mechanism, awaiting Fei to return to its water position and constantly preparing to escape.
On the other side, the "full allocation whale" and the "mining whale" (prepared to participate in liquidity mining), although currently in an "underwater position" (paper losses), do not seem inclined to flee from the FEI protocol in the short term.
Evidently, the TRIBE governance token's sudden plummet in the early hours was caused by the collective dumping of "freeloading whales," aligning with earlier expectations.
Based on the 639,000 ETH participating funds and the overall pre-swap ratio calculation at the IDO moment, the participants' coin purchase cost through pre-swap was roughly $3.2. Even factoring in the airdrop, the approximate cost per TRIBE governance token is around $2.6.
As of now, the price of the TRIBE governance token has rebounded to 2.59 FEI. However, due to FEI still being below its peg, participants with a higher pre-swap ratio are still overall at a loss.
How will Fei return to its peg, and what happens next?
After experiencing the early chaos and the initial stampede period, participants now have a preliminary understanding of the Fei algorithmic stablecoin mechanism. The developer-set "direct incentive" mechanism will deter participants from selling Fei below $0.99, while rewarding arbitrageurs to buy Fei at a lower price to slowly pull Fei back to its peg. In cases where this mechanism fails, the Fei protocol will Reweights to utilize PCV funds to push the Fei stablecoin on Uniswap back to $1.
In other words, if you want to avoid being unjustly burned, you can choose to wait for Fei to return to $0.99 or for a Reweights event to occur.
In this scenario, free-riders and arbitrageurs will rush to exit the protocol, potentially causing a decrease in the value of the TRIBE governance token due to the reduction of PCV value.
So, how can the Fei protocol avoid falling into this negative cycle? The key lies in attracting new funds to enter the PCV pool.
Currently, there seem to be three possibilities.
- One is the large exchanges listing the TRIBE governance token. Given the investment institutions (such as Coinbase) and the project's scale, this is quite likely.
- The second is that the liquidity mining rewards for Fei/TRIBE can attract more funds. Based on the rule of decreasing Staking rewards over a 2-year period, this is also a possibility.
- And the third is adding more functionality to the Fei protocol. For example, the founders of Aave and Compound, who are involved in Fei protocol financing, may announce integration news.
However, despite all this, it is still highly uncertain whether the new stablecoin model adopted by the Fei protocol can succeed. The experiment with algorithmic stablecoins still requires time to prove its viability.
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