Coinbase, Naval, Framework Ventures Back $19M Raise for a Capital-Efficient Stablecoin


Fei Labs, a project building a more capital-efficient decentralized stablecoin, raised $19 million from Andreessen Horowitz (a16z), Framework Ventures, Coinbase Ventures and AngelList founder Naval Ravikant, among others.

The raise, disclosed Monday, is another sign competition is heating up among issuers of stablecoins. These cryptocurrencies are designed to hold their value against some mainstream asset, usually (as in Fei’s case) the U.S. dollar. 

Stablecoins play a linchpin role in the crypto ecosystem, allowing traders to quickly move fiat currency (or the next best thing) between global exchanges to take advantage of arbitrage opportunities that might disappear if they waited for a bank wire to clear. In the mushrooming decentralized finance (DeFi) sector, stablecoins are a common form of collateral for loans and other contracts.

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“First, we want to be the best stablecoin in DeFi, in which we would consider DAI to be the primary competitor,” said Joey Santoro, CEO of Feil Labs, which is building the Fei protocol, and author of the white paper describing it. After that, it would challenge other stablecoins, the largest of which is Tether’s USDT, with a $37.5 billion market capitalization as of Friday.

ParaFi Capital and Variant Fund also participated in the round.

Fei’s “genesis launch” is set for March 22, when users will be able to post ETH to get FEI tokens. Early participants in the sale and in the protocol’s liquidity pools on DeFi exchange Uniswap will be incentivized with TRIBE, the project’s governance token.

Other leading stablecoins have drawbacks. MakerDAO’s DAI is over-collateralized, and requires thousands of users to manage individual vaults of their collateral. USDC and USDT are centralized and censorable. Purely algorithmic stablecoins, such as basis cash, are very strange.

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Like those assets, “FEI is basically a reserve-backed stablecoin,” Santoro said. But unlike its predecessors, FEI, on the cusp of its market debut, would work through a direct incentive method. 

How it works

From the white paper:

“This paper proposes a new stability mechanism called direct incentives. A direct incentive stablecoin is one in which both the trading activity and usage of the stablecoin are incentivized, where rewards and penalties drive the price towards the peg.”

In other words, FEI can give users bonuses or charge fees for making trades that help it maintain its peg to the dollar. The developers have tweaked the behavior of an ERC-20 token, which runs on the Ethereum network, so that certain transactions (to start, transactions with the liquidity pool on Uniswap) can face a tax or earn a boost, depending on whether FEI needs to shrink or grow supply.

FEI works on a straightforward transactional basis. “Users can buy FEI from the protocol, and the protocol takes those assets in reserve, which we call protocol controlled value,” Santoro explained. In other words, users don’t stake ETH, Ethereum’s native currency; they buy FEI. The asset traded belongs to the Fei protocol after the trade.

“That’s sort of where the magic of FEI is. The assets in reserve could be under-collateralized, they can be over-collateralized,” Santoro explained. Further, the assets would be deployed elsewhere, such as on the secondary market or – later – in yield-generating projects.

“If you want to get more FEI, you just buy it for a dollar [worth of something] from the protocol,” he said. There’s no debt that has to be maintained by users, as there is on MakerDAO, which generates the stablecoin DAI. The protocol would simply mint FEI as needed.

There will only ever be as much FEI as the market wants, because it will all just be bought on the market.

Exit ramp

What about when users want to sell? “You can’t directly redeem ETH from the protocol. You have to go to a secondary market,” Santoro said, but the Fei protocol will be placing the ETH it takes there anyway.

If and when the protocol allows other assets to be used for buying FEI, the decision to add those assets will be up to holders of TRIBE, the project’s governance token. “It doesn’t have to be just ETH,” Santoro said, but the developers will encourage the community to only add other decentralized assets, such as DAI or aDAI. Governance will also decide where to allocate the protocol’s assets.

“Fei Protocol is intentionally governance minimized,” Santoro said. 

“We are basically trying to say, ‘What’s good about Tether and what’s good about MakerDAO?’ and take the good things,” he said. The mistakes the team wants to avoid repeating include “Tether being opaque and MakerDAO being governance-heavy and over-collateralized.”

Variant Fund’s Jesse Walden said its modest governance scope and less-weighty collateralization make FEI “more socially and financially scalable.”

If ETH plunges…

When the ETH price falls and traders want to get out of FEI, selling it on the Uniswap pool will incur some kind of burn. In other words, you won’t get quite $1.00 out of your sale of one unit of FEI on Uniswap because part of it will evaporate when you initiate the trade. 

Next, the protocol can itself buy back FEI with its assets and burn the FEI. In both cases, taking supply off the market should push the price back up.

But, should neither of those strategies work, TRIBE can inflate and then buy FEI off the market as well (which is a role MKR serves in MakerDAO). This feature won’t be live at launch, but Santoro expects it will be implemented.

If FEI rises over its target on other markets, users can always go to the FEI protocol to buy more FEI at the $1 peg to take advantage of the arbitrage in the short term, boosting supply and bringing the price back in line with the peg in short order.

That said, FEI also will have certain incentivized pools, such as the ETH/FEI pool on Uniswap. When it wants to expand supply, the protocol can also mint slightly extra FEI when users trade ETH for FEI. This is a part of the direct incentivization mechanic.

Update (March 8, 18:04 UTC): Adds a16z to the list of investors who joined the round.

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