Document Analysis NLP IA
FREQ, RAKE or TFIDF
Summary (IA Generated)
Wednesday’s crypto market correction put a heavy burden on the FEI project, the latest attempt at creating an algorithmic stablecoin that would remain stable in the face of market turbulence.
Due to the particular mechanics of the protocol, the FEI token became impossible to sell as its main liquidity pool quotes a negative price for the token.
The Fei protocol is a recently-launched project that has immediately attracted billions in liquidity and total value locked by selling its FEI token, an algorithmic stablecoin using the concept of Protocol-Controlled Value to maintain a peg with the U.
Crucial to the protocol’s functioning is the ETH-FEI Uniswap pool, which is largely controlled by the protocol.
The protocol sends most of the Ether it receives from FEI buyers to the ETH-FEI incentivized pool, ideally supplying plenty of liquidity to facilitate trading.
To maintain the peg, the protocol limits how much selling can occur through the incentivized pool.
This happens by burning a significant fraction of FEI tokens used in the sale, which has the result of massively decreasing its effective price.
The burn penalty is equal to the square of FEI price’s percentage distance from the $1 peg — at a price of $0.
Further deviations paradoxically result in a negative price, which should mean that FEI sellers would need to pay buyers in ETH for the “privilege” of holding FEI.
In practice, the exchange transaction simply fails under these price conditions and nobody is allowed to sell FEI on this pool.
finance, who compiled a chart of Fei’s effective price on its incentivized pool:.
The extremely aggressive burn penalty means that the main liquidity pool for the project, which holds over $1 billion in protocol-controlled Ether, is unusable for selling FEI.
The token currently has two main parallel markets: a FEI-DAI Uniswap pool and the MXC centralized exchange.
“Fei uses incentives to maintain a peg, by applying a penalty when users sell below $1, and paying a rebate when users buy Fei below $1.
Despite the apparent complexity, Fei’s mechanism is based on a similar principle to most fiat currencies, where central banks often use their own reserves of gold and foreign currencies to back their currency’s value during periods of strong selling pressure.
Given Fei’s heavy restrictions on liquidity, the fact that it is trading relatively close to $1 and nobody is yet taking up Leshner on his offer, are good signs for the project.