A post-mortem analysis on the most hyped algocoin (unstablecoin) launch
Typically I am dancing on graves when I see fellow Degens get REKT investing in S***coins. However, with the amount of hype behind the legitimacy of this project fueled by management team and investors’ marketing, I cannot help but feeling incredibly sympathetic to those who were influenced into participating in FEI’s genesis launch.
Early investors included reputable VCs (discussed below) and some of the leading voices and developers in the space. On FEI’s Discord, Rune Christensen, the founder of Maker, invested millions of USD of ETH into FEI, because 1) he invested in the bootstrapping phase and was able to purchase FEI at a discount across the bonding curve; and 2) participated in the airdrop of TRIBE, the governance token, which was a “kiss” proportional to the amount of FEI he invested.
But, unfortunately for Rune, he could not exit at an economically viable price because of Game Theory. Everyone had the same plan (receive airdrop in TRIBE then dump!). As a result, FEI is now way below its peg.
With so many “legitimate” investors involved in the project, retail investors were provided a lot of false confidence. Most analysts will conclude that the aftermath of FEI is 1) this was an overhyped project and that crowded investments are the worst type of investments and 2) “DYOR” or Do Your Own Research. In bull markets, these principles and disciplines all evaporate… Just ask Melvin Capital and Archegos.
Howard Marks once wrote in his heralded memos after the Great Financial Crisis: “Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for OPTIMISM when pessimism is excessive.” — In non value-investor lingo, investment opportunities exist best when everyone is fearful.
Today, we are going to review the 4 Simple Steps of Fundamental DEGEN, and reanalyze FEI TRIBE with a lens of heavy skepticism.
How Does FEI Work? — Viable Model with a Clever Solution
Currently, the only viable solution for stablecoins outside of the centralized ones such as USDT, USDC etc. is Maker’s DAI, which runs on a decentralized protocol. The solution is extremely simple. It is basically an overcollateralized loan in which users deposit collateral (ETH) into the Bank of Maker and receive 2/3 of what they deposited. While it is not a perfect solution, and in the past, has shown some level of instability especially during periods of market volatility, it is currently one of the primary vehicles driving liquidity on DeFi applications.
The problem is the Bank of Maker is extremely capital inefficient. If Bank of America decided to lend 2/3rds of its deposits because the risk management department suddenly decided to be extremely cautious, its share price would be crushed because Wells Fargo would lend 100% of its deposits to Bank of America’s clients. After the GFC, regulations capped commercial bank’s ability to lend with Basel II/III capital ratios. Most of the speculative lending then went to the shadow banking system (hedge funds/private equity), which is more isolated from idiosyncratic risk. Today, we are faced with a very similar situation in which lending markets are restricted not because of regulations (thankfully), but because of design.
There have been several attempts to create Algocoins ranging from projects such as Ampleforth, which has an inflation adjustment mechanism in users’ wallets, Reserve, which uses the dual stablecoin and governance token model, and the now defunct Basis, which stepped over regulatory lines with its “Stocks” and “Bonds” design — probably not the smartest move to name its tokens after securities.
In comes FEI with a clever solution that competes against Maker DAI. Essentially, FEI is minted or burned based on trades. The debt component that Maker DAI relies on, is not utilized in this context.
FEI uses bonding curves and direct incentives to maintain a peg. The basic premise of bonding curves is that with more supply (x axis), the price/cost of the token (y axis) increases. So those who enter earlier when the supply was low, could theoretically exit at a higher price.
What was the original incentive to invest in FEI?
The initial FEI sold on the bonding curve was issued between $0.50 to $1.00. This bootstrapping phase called genesis launch had a cap of 250M FEI triggered at $1.01.
We will skip the gory details (because the project is probably knee capped to death). The incentives are unique in that when users sell below the peg, it over penalizes sellers and gets worse the further away from the peg. And when buyers are pushing the peg up, they are rewarded. This is facilitated by a burning mechanism whenever FEI is sold below the peg. FEI can only do this because they have a reserve of collateral backed by ETH worth $1.2B funded during genesis.
Now you might be wondering, where did the $1.2B come from when the initial boostrapping had a cap of 250M FEI?
Red Flag Level: Tabasco Hot Sauce. The most important question would be how FEI would operate in a scenario where the collateral of ETH is affected by market volatility. This was the main concern in investor’s mind going into the genesis launch.
House of Cards
During the genesis launch, users can purchase FEI at most a 50% discount from the cap of the bonding curve. The supply growth rate incentivized collateral deposits.
How did the project go into full DEGEN mode?
The kisser was an additional airdrop of the governance token TRIBE. It was pro-rata to the amount of FEI purchased during the genesis event. This is where the discrepancy between the $250M FEI and $1.2B FEI lies. The project had an insane level of demand, which at the time, is great for an algocoin project that relies on a constant stream of demand to keep its peg in check.
Why is this important? Because for almost every Algocoin model, the governance token is worth a lot more than the underlying stablecoin. So far Terra Luna is the most successful example of this, but the difference is that Terra Luna has an actual real life use case backed by e-Commerce transaction fees to maintain the peg between Terra (Stablecoin) and Luna (Governance Token).
Then upon launch on Uniswap, all hell broke loose. Everyone rushed to the exit to capitalize on the free TRIBE tokens, but then they found out that their FEI would be sold at a huge discount. Why? Because the penalty mechanism was activated: (Peg-Current Price)²
Almost all the liquidity for TRIBE came through the TRIBE-FEI pair. Those who wanted to profit from the airdrop of TRIBE and transfer into ETH would be punished for selling FEI because that pair dominated the liquidity pool options. If they wanted to sell straight to ETH, they would also get crushed because of high slippage costs with low liquidity from the TRIBE-ETH pair.
As a result, the performance post launch was an unmitigated disaster. @Bantg provides an analysis below with reweights.
Red Flag Level: Bleeding Ghost Pepper. Once the floodgates opened with TRIBE airdrop, the investment thesis went from bootstrapping an interesting algocoin to overcrowded speculation. In post-mortem, the key question to management team would be whether there is a delay on the sell of TRIBE post launch. And, whether there would be isolated risks from those selling TRIBE, impacting the valuation of FEI. In other words, could the PCV fund also help provide liquidity to FEI-ETH?
Unproven Management Team — Over their Skis
— I want to be incredibly careful talking about Joey, Sebastian and Brianna. After all, they are young entrepreneurs who are contributing to the crypto ecosystem and they have their side of the story to tell.
Joey Santoro — Co Founder
- Okta — Software Engineer (1.5 Years)
- Duke University, BS Computer Science 2019
Sebastian Delgado — Co Founder
- Dharma — Software Engineer (2.5 Years)
- Uber — Software Engineer (2.5 Years)
- UC Berkeley, BS Computer Science 2014 or 2015
Brianna Montgomery — Business Lead
- Consensys Diligence — Business Lead (2 Years)
- Coriant — Head of Customer Team Enterprise (2 Years)
- DefenseStorm — Director of Sales (2.5 Years)
My quick assessment of this management team is that they are very young and ambitious, and at least on the engineering side, they are competent. I’m sure with their investors, they also have a strong advisory team supporting their development and providing a foundational roadmap for their token launch.
As an investor, I would definitely be drilling down on their “grit”. One thing that I’m not sure about is whether they are “in it” for crypto. Sebastian and Brianna were both in crypto during the bear cycle, but this is Joey’s first real crypto stint. How these 3 individual react to the fall out of FEI would determine whether they have a sustainable career in crypto OR even a career outside of crypto. It’s difficult to get second chances, but how this team handles moral quandaries would determine that extent.
I don’t want the takeaway to be that the management team “fleeced” their investors. I think the terms sheets they were provided by VCs include several goalposts and milestones that then provide them access to capital. I don’t think management team was paid in anyway that would set them up for their entire lives (the genesis launch, if it were a success, would). The business of VC investing is cruel to the entrepreneur and I’m sure the VCs did everything to protect their downside.
While I’m willing to give this team the benefit of the doubt, something unfortunate caught my attention from Brianna.
There are a few interpretations: 1) Benefit of the doubt: This was always the plan to use idle capital efficiently; or 2) Nefarious: This was always the plan to use trapped retail investors money to generate higher APYs for the project.
Nonetheless, there are several speculations from the community about management’s intent. This is compounded by absolute silence on social media platforms including Telegram and Twitter. Retail investors are extremely angry and demanding their money back from this project.
Red Flag Level: Frank’s Hot Sauce — Nefarious with malintent? No. Inexperienced, yes. Further interviews with management team especially more exposure pre-launch might have helped build further confidence with the investor community.
Ivory Tower Investors — Private Gains, Socializing Losses
FEI made headlines as it raised $19 million from a16z, Framework Ventures, Coinbase Ventures, and Nascent, among others.
We have very little information, which is common and also the privacy of investors, on the terms of the investment:
My problem is whether investors cut the line and exited before retail investors — Whether there was preferential treatment involved.
My second problem is post-launch whether investors were able to scoop up FEI at $0.20-$0.50 and soon (discussed below) have the ability to exit at par.
There is no evidence suggesting this, only some smoke and speculation:
Nascent Capital’s Dan Elitzer, a backer of Fei, told CoinDesk over Twitter DM:
“I find it hard to believe that people are selling because they think it’s undercollateralized; they’re selling because a lot of them aped into a system they didn’t understand, thinking there was a pure arb opportunity. There just isn’t enough natural demand for FEI at this point given the massive initial supply, hence the sell pressure.”
This is extremely callous to just blame retail investors like its NKLA or HRTZ or GME again. Great job Elitzer, you managed to sign yourself up for the CNBC talking heads waiting list.
Red Flag Level: No comment… Pre-”post-mortem” of course we would say this is the “gurantee” for investing in this project. Better understanding of the terms would provide greater security. However, when you see A16Z and Coinbase involved, you're always going to give them the benefit of the doubt.
Where Does FEI Go From Here?
The community is extremely pissed off and sentiment on FEI is overwhelmingly pessimistic. Currently, founder Joey Santoro is proposing ideas to stabilize FEI’s peg
[Members of the Tribe Community] suggested an auctioning of PCV or selling at a discount. There are currently ~2 billion FEI of which ~1.2 billion are owned by FEI Protocol and ~200 million are timelocked in the TRIBE-FEI pool. The ~$950m PCV can directly support a FEI price of up to $1 for all user redemptions, with an excess of collateral.
The Tribe community needs to decide the exchange rate to use for FEI. For simplicity, we propose 2 options, a full redemption for $1 or a discounted rate of $0.90.
This is similar to what I would propose as well. A much needed equity or cash injection by the management team or investors to restore the peg back to $1.00 or as close as possible as to optically restore the value of FEI and confidence in the project.
However, the problem with this idea, is moral hazard. This ultimately rewards investors who ape’d into this project during genesis and they are getting bailed out by this proposal, making a quick 10–25% flip.
I’m going to contradict myself here and say that this moral high ground should no longer exists… Because there’s “smoke” that VC investors might have been able to exit in-front of the line. Therefore, this “optionality” to exit at $1.00 or $0.90 is warranted.
But let’s not imagine that the management team is proposing this because “its the right thing to do”. 1) They still hold a ton of FEI in their pockets. 13% of the initial TRIBE supply also belongs to the team. And 2) if and when this fails, and they need to find jobs, their future employers will monitor these events in hiring decisions — after all the management team is < 30 years old.
The vote ended Saturday 04/10/2021 at 4PM PT. And it would be fascinating to see what ultimately occurs after the results.
— Update: No change! Results below:
Notice the 1M+ Stake and # Voters. Completely dwarfed the smaller voters.
Patrick Silverlake’s Art of War
— This idea would not be executable for this project, but as a former credit investor, I cannot help but think of a couple strategies.
If I was Arca, BlockFi, SALT, Silvergate (hello Silverlake!), or any of these credit funds, I would be salivating over the potential idea of providing some type of Asset Backed Loan to this project.
What I’m really keen on is using the collateral of the 639K or so ETH committed to this project (derived from the $1.2B collateral value) as my protection while starting at a lending rate of +20% annual coupon. As one of these investors, I could outlast these projects because my priority is to harvest capital. Below are some of the important tokenomics metrics for this project (shout out to Korpi87 who started this framework):
With this information, I would draw these private lending terms as a starting point for negotiation:
While these are extremely aggressive terms relative to traditional high yield markets and current private lending terms, with FEI staking at 90% APY, I could use that to drive the price in my negotiations.
I will also limit the use of proceeds for activities that help develop FEI’s business activities. These involve funding liquidity pools not just on Uniswap but other major protocols including Sushiswap, Bancor, PancakeSwap, and Balancer. The project could also introduce incentives to TRIBE holders whether it is through staking rewards or providing liquidity. This would essentially be a DeFi pivot strategy. The objective is to be ubiquitous and re-legitimize this project to the eyes of individual investors — which may never be possible.
I might also include other terms in there that allows me to purchase all the remaining FEI in supply or shift them away from management team’s pockets. I might also include an option for VC investors to exit in exchange for their equity stake. But, what I need is an absolute guarantee on my seniority status in the capital structure. No way will the VCs, management team and token investors get a cent from my investment unless I’m paid in full.
Of course, this would never happen. No lending company will offer $350M of exposure to this project. But one can always fantasize… However, I would not be surprised at all if Andre Cronje or SBF acquired FEI as Andre took advantage of the negative sentiment behind Sushiswap and completely reinvented the project.
Did You Know?
Howard Mark’s son Andrew Marks is a big time crypto investor. Not bad being a total contrarian when the patriarch once called Bitcoin a “pyramid scheme”. Howard Marks, like other boomer investors, also 180'd on his attitude and perspective towards cryptocurrencies.
Special Shout Out and Additional Sources:
I want to give extra props to the following authors. This is an extremely complicated subject matter and these folks have done a great job translating it into lay-man speak.
- Jon Wu https://twitter.com/jonwu_/status/1378534956880830465
- Emin Gün Sirer https://twitter.com/el33th4xor/status/1379763666334138372
- Justin Bram What to do if you invested in the Fei Protocol
- The Defiant What happened in the FEI Protocol Genesis Event?
- Rekt Newsletter https://rekt.news/fei-rekt/
- Anthony Sassano https://thedailygwei.substack.com/p/a-terrible-feight-the-daily-gwei
- Ryan Watkins https://messari.io/article/fei-protocol-a-new-model-for-stability
- Brady Dale https://www.coindesk.com/1b-fei-stablecoins-rocky-start-is-a-wake-up-call-for-defi-investors
- Korpi87 https://t.co/65VuSCyL4I?amp=1