The situation around the algorithmic stablecoin Fei Protocol has worsened since the last report about the problematic launch of the project, due to which the assets of investors for $ 1 billion were blocked. The protocol now gives negative values when trying to sell a stablecoin.
Fei Protocol penalizes holders of their tokens if they sell them when the price falls below $ 1. At the current rate of $ 0.9, the penalty is about 100%. Due to the formula used by the protocol, the price takes negative values, that is, in fact, sellers must pay extra to buyers on the air (ETH) in order for them to accept their tokens. In practice, this means that it is impossible to conduct a transaction with a token.
Yearn.finance developer Banteg has presented a historical chart showing the relationship between FEI nominal and actual prices.
A relatively small decline in the market rate leads to a collapse in the actual value of the FEI, taking into account penalties in the negative zone
At the same time, Fei Protocol still has over $ 1 billion in liquidity that cannot be used due to the mechanism of preventing sales. In the OTC market, FEI transactions are priced at around $ 0.70. The founder of the DeFi project Compound, Robert Leschner, who actively supports the Fei Protocol, announced that the stablecoin is currently not functioning due to the discovered vulnerability. The developers turned off the mechanism of rewarding buyers with additional tokens when they are purchased below the dollar, and left only fines for sellers.
Fei also has a built-in rebalancing mechanism designed to bring the price of the stablecoin back to the dollar in the event of prolonged deviations. However, each activation of the mechanism is followed by a large wave of selling, since at this point investors can get rid of the problem asset at the best rate.
“The FEI penalty mechanism doesn’t just eliminate the proposal. It eliminates demand. It punishes both parties, thereby narrowing the opportunities for the coin to be sold, ”said the founder of the Avalanche project, Emin Gün Sirer.
The developers insist that the stablecoin still has excess collateral, that is, the value of the ether providing it exceeds the volume of tokens in circulation. They are now exploring various options to remedy the situation, including launching regular rebalances and limiting seller penalties.
“I find it hard to believe that people are selling out of fear of undersupply. They sell because many of them rushed to invest in a system they don’t understand, thinking they have a clear opportunity for arbitrage. There is simply not enough natural demand for the FEI right now, given the initial supply, hence the selling pressure, ”said Dan Elitzer, an investor in Fei Protocol at Nascent Capital.
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