Fei Protocol supports the creation of a decentralized, scalable, and fair stablecoin on Ethereum. The supply of the FEI stablecoin has no upper limit and can track demand, entering circulation through sales along a bonding curve. The price function will initially reward early adopters who purchase FEI at a lower price. Its mission is to create a fully decentralized stablecoin, a position that the development team hopes the future governance community will uphold.

The FEI stablecoin has an unlimited supply that tracks demand and enters circulation through sales along a bonding curve, which approaches and fixes at the $1 peg. When new demand for FEI arises, users can acquire it by purchasing on the bonding curve. The price function will start by rewarding early adopters with a lower price for buying FEI. Fei Protocol will support creating bonding curves with any ERC20 token but will launch with only a single curve denominated in ETH.

Creating a fully decentralized stablecoin is Fei Protocol’s mission, so it’s critical that tokens issued by trusted third parties (such as USDC, USDT, wBTC) aren’t used as collateral on the bonding curve. This is a stance the development team hopes will be shared by the governance community post-launch.

Before fixing the price at $1, the ETH bonding curve will have a target FEI supply for bootstrapping purposes. This target is called “Scale,” and reaching Scale signifies the end of the bootstrapping phase. According to the introduction, Scale will be set at 250,000,000 FEI. Upon completion of the Scale phase, the bonding curve price will be fixed above the pegged price with a governable buffer. This creates a cap across the ecosystem where, if prices elsewhere are higher, arbitrageurs can buy on the bonding curve and sell on secondary markets.

It’s important to note that users cannot sell FEI on the bonding curve. Instead, incoming ETH is held as Protocol Controlled Value (PCV). Fei Protocol uses PCV to create a liquid secondary market where users can sell their FEI back for ETH. Below, we’ll explore how PCV supports the FEI ecosystem.

Fei Protocol is an ideal application for broad PCV, with the bonding curve and other incentive mechanisms funding the PCV pool. Initially, 100% of the PCV funded by the ETH bonding curve is allocated to the ETH/FEI asset pair on Uniswap. Uniswap was chosen due to its low barrier to entry and higher familiarity among regular DeFi users. Governance could reallocate PCV to other platforms if clear use cases emerge. Compared to stable mechanisms that rely on external liquidity providers, this approach offers two key advantages:

Guaranteed Liquidity: FEI holders can rest assured knowing that no whales can drain the protocol-owned liquidity. It is funded by the bonding curve and placed into the Uniswap ETH/FEI asset pair.
Peg Repricing: If the price remains below the peg for a long time, Fei Protocol can reprice the Uniswap price back to the peg. This is achieved through an atomic transaction: (1) extracting all protocol-owned liquidity, (2) buying FEI with the withdrawn ETH to bring its price back to the peg (3) replenishing the remaining PCV as liquidity (4) burning excess FEI. Any keeper can trigger peg repricing when the price has been low for a period. The protocol incentivizes keepers through FEI minting rewards.

PCV readjusts the FEI/ETH Uniswap pool to the pegged price.

Through governance, future use cases for PCV can be more creative. The protocol could maintain a collateral balance on lending platforms like Aave. Then, it could adjust interest rates in the FEI market by supplying and borrowing FEI tokens, and more.