Stablecoin Watch: Fei USD – Another One Bites the Dust
- By Dalvir Mandara
- 6 min read
Summary
- Fei USD (USD) breaks its peg according to data from CoinGecko.
- USDD is the only stablecoin of those we track to have registered an increase in market cap over the past week.
- USDD climbs back to $0.99.
- Yields on stablecoins are mixed but remain elevated for Pax Dollar (USDP) on Compound due to high utilisation on the protocol.
Fei USD (FEI) Breaks Its Peg
Fei USD (FEI) has consistently ranked highly for annualised volatility in our weekly stablecoin updates, and it is now the latest stablecoin to have broken its peg according to data from CoinGecko (Chart 1). The news comes as other algorithmic stablecoins face difficulties after the TerraUSD debacle.
We also note that other data providers such as CoinMarketCap and Crypto.com show a less extreme de-peg than that of CoinGecko, which is interesting in itself. But It’s too early to tell what may have caused the de-peg, we will be following this closely as it unfolds.
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Summary
- Fei USD (USD) breaks its peg according to data from CoinGecko.
- USDD is the only stablecoin of those we track to have registered an increase in market cap over the past week.
- USDD climbs back to $0.99.
- Yields on stablecoins are mixed but remain elevated for Pax Dollar (USDP) on Compound due to high utilisation on the protocol.
Fei USD (FEI) Breaks Its Peg
Fei USD (FEI) has consistently ranked highly for annualised volatility in our weekly stablecoin updates, and it is now the latest stablecoin to have broken its peg according to data from CoinGecko (Chart 1). The news comes as other algorithmic stablecoins face difficulties after the TerraUSD debacle.
We also note that other data providers such as CoinMarketCap and Crypto.com show a less extreme de-peg than that of CoinGecko, which is interesting in itself. But it is too early to tell what may have caused the de-peg. We will be following this closely as it unfolds.
What Is Fei USD (FEI)?
Fei USD (FEI) is a decentralised stablecoin launched by the Fei protocol in April 2021. It is an algorithmic stablecoin that uses protocol controlled value (PCV) to maintain its peg. The protocol is also controlled by a governance token called Tribe (TRIBE).
What Is Protocol Controlled Value?
The main idea of PCV is that the project itself is the primary owner of liquidity, as opposed to borrowing liquidity from users. When a user sells assets (e.g., ETH) to receive Fei USD (FEI), the protocol controls all those assets. This ownership allows the protocol to use PCV for various activities such as maintaining the peg stability and providing liquidity. An algorithm is used to allocate the assets in PCV for liquidity providing, managing risk and earning yield etc.
In Version 1, the stablecoin could not be redeemed for the underlying collateral, which made the PCV permanent. This model ultimately failed and led to Version 2. This version changed several things, one of which was providing the ability to make Fei USD (FEI) 1:1 redeemable for PCV reserves.
How Is It Backed?
The PCV comprises several tokens but chiefly ethereum. According to their website, ethereum makes up 40.9% of the total PCV, and DAI comes in second at 39.1%. So 80% of PCV is made up of ETH and DAI, and the remaining 20% is LUSD, VOLT, agEUR (a stablecoin pegged to the EUR), and BAL.
Latest Developments
Market Cap and Peg Risk
Binance USD (BUSD) is the only coin in the top three by market cap to have registered an increase in its market cap over the past 24 hours (Table 1). Over the past seven days, USDD is the only stablecoin to have registered an increase (2%) (Chart 2). The market caps of Magic Internet Money (MIM), Dai (DAI), and Binance USD (BUSD) are all flat on the week. All other stablecoins registered a drop in market cap, with Fei USD (FEI) and Frax (FRAX) leading losses at 10% and 4%, respectively.
USDD has recovered to a value of around $0.99 after continuing to de-peg last week. Fei USD (FEI) has de-pegged according to data from CoinGecko and is currently trading at a around $0.93.
Volatility
The one-month annualised volatility of USDD remains highest (Chart 3). Fei USD (FEI) and Magic Internet Money (MIM) come in second and third, respectively.
Over the past three months and year, Fei USD (FEI) leads with an annualised volatility of 8% and 10%, respectively. Magic Internet Money (MIM) and Frax (FRAX) both appear in the top three most volatile stablecoins over the past three months and one year too. All three are either algorithmic or crypto-collateralised stablecoins.
Yields
Turning to yields, on Compound, average lending rates are up for Dai (DAI), USD Coin (USDC) and Pax Dollar (USDP) (Chart 4). Yields are down for the rest. Average borrowing rates on Compound follow suit (Chart 5).
Pax Dollar (USDP) continues to display the largest yields on Compound. This is driven by very high utilisation rates on the platform currently. We described how utilisation relates to yields in a previous stablecoin update.
Lending and borrowing rates are mixed across the stablecoins on other DeFi protocols (Tables 2 and 3).
Appendix
USDT: Tether is a fiat-collateralised stablecoin primarily issued on the ethereum and bitcoin blockchains. It aims to be pegged 1:1 against the US dollar. Tether’s reserves are not backed 100% by US dollar deposits. Instead, they are backed by reserves that include cash, cash equivalents, short-term deposits, commercial paper, corporate bonds, funds, precious metals, secured loans, and other investments including digital tokens.
USDC: USD Coin is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is 100% backed by cash and short-dated US treasuries. USDC publishes a monthly public attestation of 100% reserves.
BUSD: Binance USD is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is backed 100% by USD held in Paxos-owned US bank accounts and US treasury bills (including through repurchase agreements and/or money-market funds invested in US treasury bills). Paxos is a New-York-regulated financial institution and publishes a monthly public attestation of 100% reserves.
TUSD: TrueUSD is a fiat-collateralised stablecoin issued by the TrustToken platform that is issued as ERC-20 tokens on the ethereum blockchain. It aims to maintain its 1:1 peg against the US dollar by being fully collateralised by US dollars using multiple escrow accounts to reduce counterparty risk.
USDP: Pax Dollar is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It aims to be pegged 1:1 against the US dollar by holding USD reserves in Paxos owned US bank accounts.
DAI: Dai is a crypto-collateralised stablecoin that attempts to maintain a 1:1 peg against the US dollar by depositing other crypto assets into smart contracts on the ethereum blockchain every time a new DAI token is issued. DAI is maintained by a decentralised autonomous organisation (DAO) called MakerDAO. And since the mechanism is maintained by a system of smart contracts, it has higher decentralisation than the centralised entities controlling USDT, USDC, or BUSD.
MIM: Magic Internet Money is a crypto-collateralised stablecoin launched by the DeFi platform Abracadabra. MIM is backed by interest-bearing tokens (ibTKN).
UST: TerraUSD is a crypto-collateralised hybrid stablecoin native to the Terra blockchain. To mint 1 UST, $1 worth of UST’s reserve asset, LUNA, must be burned. The idea was to try and ensure LUNA’s long-term growth. More people buying into UST means more LUNA gets burned, which should make the remaining LUNA supply more valuable. However, the system collapsed recently when UST de-pegged from the US dollar.
FRAX: Frax Finance is a fractional-algorithmic stablecoin that uses both collateralisation and an algorithmic process to create its decentralised stablecoin that is pegged 1:1 to the US dollar. Only stablecoins (currently, USDC) are accepted as collateral by the protocol.
FEI: FEI is an algorithmic stablecoin that aims to be pegged 1:1 against the U.S dollar that is backed mostly by ETH.
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.