Fei Protocol Genesis Locks in $ 1 Billion in ETH, But LPs Could Face Losses

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Despite attracting over $ 1 billion, the Fei protocol genesis event hasn’t been entirely easy, with LPs facing losses if they retire soon.

The launch of the Ethereum-backed stablecoin called Fei has locked down nearly $ 1 billion worth of ETH during its genesis event. But the launch has not gone quite as planned for some of its liquidity providers.

The protocol, which launched a genesis event on April 1, introduced a stablecoin that is partially backed by Ethereum and uses link curves along with direct incentives to maintain the correct parity. These direct incentives penalize price fluctuations away from parity and reward operations that drive prices towards parity.

Messari researcher Ryan Watkins observed the genesis event, which included an airdrop to liquidity providers. More than $ 1 billion USD worth of Ethereum was locked due to these protocol mechanics.

Watkins noted that most early adopters will want to liquidate to get their ETH back and make a profit, stating: “The problem with FEI right now is that most people want to sell it back for ETH, but doing so carries extreme penalties. Eventually, Fei will weigh again to bring FEI back to peak, but then what? There is little real demand for FEI and most are still racing towards the exits. “

However, the penalties for eliminating liquidity are related to the direct incentive mechanism that uses a dynamic burning system to influence the price. The protocol explains:

“This means that if you need to sell FEI in a quick period of time during a period of high selling pressure, you could incur a significant burn penalty. FEI’s stability mechanisms are geared toward long-term retention. “

The researcher added: “I imagine that many people who participated in the offer were surprised by this inability to exchange FEI for their guarantee.”

FEI will have an unlimited supply that tracks demand, and the coins will enter circulation through sale along a peg curve approaching $ 1 parity.

The protocol uses a concept called ‘Protocol Controlled Value’ (PCV), which means that when users deposit collateral, equity is owned and managed by the protocol, so liquidity cannot simply be extracted. This makes it more decentralized than other stablecoins like Tether, USDC, or BUSD.

To kick off the genesis event, the protocol allowed users to coin ETH bond curve FEIs at a discount starting at $ 0.50. The supply-based growth rate would result in the stablecoin reaching its parity once sufficient collateral has been deposited.

A ‘Genesis Group’ of early adopters and investors had been created to participate in the launch. The launch would also include an airdrop of its governance token called TRIBE. On April 1, the co-founder of the protocol, Sebastián Delgado, tweeted:

“Enough ETH has been raised in the early hours of @feiprotocol Genesis for the protocol to reach the scale target of 100 million $ FEI circulating”

However, it didn’t stop there and as much as $ 1 billion in ETH had entered the protocol on April 4 when the FEI supply rose to 2.5 billion. Those chasing quick money and airdrop now have no choice but to hold FEI until it gets back on its peg.

Watkins also noted that the launch also boosted Uniswap’s liquidity (where the FEI / ETH pair was trading) up to $ 8 billion.

At the time of writing, the pair had a collateral level of $ 2.57 billion and daily volume of $ 65 million according to Uniswap statistics. The stablecoin was trading below its peg at $ 0.945 according to Coingecko.