This article will explore different use cases for FEI, such as earning yield and leveraging your portfolio. In DeFi, your first decision is related to the stablecoins you are going to use. Some points to consider:
✅ Safety (collateralization and peg mechanism)
✅ Liquidity
✅ Decentralization (censorship resistance)
Fei Protocol, a project backed by a16z and other relevant investors, created FEI, an ERC20 token on the Ethereum blockchain that is pegged to one US dollar. It is one of the most liquid decentralized stablecoins with a daily average volume of $ 52 million. FEI is an interesting alternative for centralized stablecoins, such as USDC and USDT.
Fei Protocol defends the one dollar peg with its protocol reserves (more than $ 1 billion), which backs the redemption of Fei for $ 1. Considering the 255 million Fei in the user’s hands, the collateralization ratio is huge. More users of FEI will mean more protocol reserves.
Source: Fei Analytics
Besides the reserves, Fei v2 will implement TRIBE backstop, an automatic protection in case collateralization decreases below a target. If that happens, Fei Protocol mint as much TRIBE as needed to back FEI users' redemptions. This mechanism reduces circulating FEI and restores the reserve ratio to the target, while keeping TRIBE inflation under control.
All the protocol controlled value is onchain and invested in some crypto assets, such as ETH, DAI and others (for more info, check Fei Analytics). It is highly integrated within the DeFi ecosystem and you can find ways to earn yields greater than 20% APR.
You can buy FEI in any Decentralized Exchange, such as Uniswap or through interfaces like Zerion. I am a fan of Zerion! It is so simple to use and there are no fees (just the gas costs from Ethereum and the exchanges).
If you are a crypto investor looking for yield, you need to follow the Serenity Fund weekly market overview. The crypto “risk-free rate”, the yield earned by just depositing stablecoins in Compound, Aave or Curve, is around 6% APR. The average yield you can earn using other stablecoin platforms is 20% APR.
By using FEI, you can avoid volatility and market risk while earning a decent yield. Besides the Yield seekers, FEI can also help the traders looking for borrowing stablecoins to leverage their portfolio. Let’s explore the alternatives for these 2 personas below.
Yield Seekers
The yields below are attractive. However, you need to consider the specific risks in each option to better calibrate your exposure.
Source: https://app.fei.money/farm
Providing liquidity to a stable pair in a decentralized exchange (DEX), you assume the risk of de-pegging of the other stablecoins. These are the cases of FEI+3CRV, which is the meta pool in Curve Finance containing USDC+USDT+DAI+FEI, and G-UNI FEI-DAI that uses Uniswap v3. Curve highlight this risk:
“Permanent loss of a peg
If one of the stablecoins in the pool goes significantly down below the peg of 1.0 and never returns to the peg, it'll effectively mean that pool liquidity providers hold almost all their liquidity in that currency.”
I find the option of Gelato FEI-DAI, the G-UNI FEI-DAI, interesting, as you have less risk from centralized stablecoins like USDC and USDT. On the other hand, Curve finance is a mature project that handles billions of dollars. So, it is more battle-tested.
When providing liquidity for TRIBE-FEI on Uniswap v2 you have the Impermanence Loss and the market risk from holding Tribe. If you have any doubts about staking FEI-TRIBE, you can check this: Staking Fei User Guide. Another option is supplying TRIBE to Rari Capital, but you still have the market risk from holding Tribe. And for everything in DeFi, you will face smart contract risk.
In lending protocols, such as Aave and Rari Capital, you need to analyze the collateral risk and the liquidation mechanism. Credit in crypto is overcollateralized, but if the market changes fast the collateral backing your credit can reduce quickly. Before lending Fei to a pool, it is good to understand the collateral, the Loan to Value, the interest rate model to better evaluate the risk. Aave already has a consolidated risk policy, but for Rari capital these parameters can vary for each pool.
Finally, we have the recently launched Idle Fei. It gets your FEI and invests with the best strategies, trying to take advantage of the various available yields for Fei.
Source: Idle Finance
Leveraged Traders
For traders, borrowing FEI in Aave is an interesting alternative. It is currently incentivized and offsets part of the interest rate. For borrowers, FEI has an advantage over using DAI. When the market is deleveraging its position quickly, DAI could trade above $1, resulting in a series of liquidations. As FEI does not use a leverage mechanism to keep the peg, it does not suffer from it.
Another alternative is using Rari Capital. You can deposit TRIBE or the governance token from your project, such as NFTX, Badger, StakeDAO, Barnbridge, Shapeshift, etc. This deposit can be your collateral to borrow FEI. These markets are still small, but can develop with time. One important advance will be when Rari Capital launches a Yield Aggregator for FEI.
With the borrowed FEI, you can buy the token you are bullish or even stake for some of the FEI yields above.
So, that's it for today. Talking about risks is as important as talking about yields, so you can better calibrate your positions. You found ways you can use Fei and explore the opportunities in DeFi.
Please note that this letter is not intended as financial advice.