The goal of the Fei Protocol is to maintain a liquid market in which ETH/FEI trades closely to the ETH/USD price. FEI achieves this via a new stability mechanism known as direct incentives. Direct incentive stablecoins use dynamic mint rewards and burn penalties on DEX trade volume to maintain the peg. FEI uses Uniswap as its incentivized DEX at launch. Governance can add and update DEX integrations and other incentives as needed.Joey Santoro
FEI Incentives We discuss the mechanics of the FEI incentive contracts in the FEI token section. This section focuses on the way that incentive contracts help maintain the peg. There will be a single initial incentivized Uniswap pool, ETH/FEI. If the price is below the peg, the incentive contract will offer a FEI mint to traders. The next trader to buy FEI on the pool will receive the mint as an incentive for helping return towards the peg. This incentive will take into account the time-weighted magnitude of the distance from the peg.
id: 3c3fa80673aa0c42ea84eded651ac6b6 - page: 11
For example, a 5% immediate deviation from the peg will have a small initial incentive. The incentive will grow over time and at a faster rate than if there was only a 1% deviation from the peg. This creates a reverse Dutch auction mechanism. The mint offered increases over time until a trader accepts the offer by purchasing on Uniswap. This happens atomically and directly on the Uniswap transfer. The traders who are willing to come in for a lower incentive will be the first to restore the peg and get the mint. The following formula is used to achieve this mechanism. Let be a time-weighted function where w(t) time the peg was restored. The output is by governance). Let executes. is the number of blocks since the last t per block (set r initialized at 0 and grows linearly at rate be the magnitude of the price deviation from the peg before the swap m P (X) O(X) O(X) is defined as defined as m . The incentive function is: 11 I (x, )
id: b006e3d29b8ce89d4cd36ee348e763dd - page: 11
If a trade partially t will be partially updated by multiplying it by t fills the peg, /mmend peg by trade volume required would result in a 50% reduction of at rate . A 50% move towards the start which will resume its growth t,
id: 798b28edca918c735451c3513001922f - page: 12
be .01 per block, the total liquidity in the pool be 200 r To give a concrete example, let's have ETH and 10000 FEI, and an oracle price of 525 USD/ETH. The instantaneous exchange rate here is 500 FEI/ETH, representing a 5% deviation from the peg. After 10 blocks the time weight will equal 0.1. At this point the purchase of FEI towards the peg will reward the trader with 0.5% of the trade value in FEI. It is important for this mechanism to not be gamed. It is also important to disincentivize trading away from the peg. Fei Protocol achieves this via a dynamic burn mechanism on top of the Uniswap pool when trading below the peg. Similar to the mint, this burn will take into account as opposed the distance from the peg. The burn is not dependent on time. The used is m
id: 86162961aaa7ced99d9198ee624156e6 - page: 12