Independent crypto researcher Ignas announced on his Twitter account why the Fei protocol will be closed.
What is Fei? “Fei is a decentralized, scalable, and DeFi-native stablecoin protocol.” One Fei USD is equal to one dollar, the protocol is secured only by decentralized assets. Tribe DAO, owners of Fei protocol and Fei USD, are open to cooperation with other DAOs.
At the moment, the capitalization of the Fei USD stablecoin, according to Coinmarketcap, has exceeded $423 million. In general, at first glance, (almost) everything is fine. But, the crypto researcher Ignas considers that the protocol will cease soon. Why is that?
To begin with, it’s worth figuring out how the Fei protocol works. As mentioned earlier, the Fei USD stablecoin is backed by decentralized assets. Fei differs from other protocols (such as Dai) in that user “assets are ‘owned’ by the protocol.” User assets are stored in Protocol controlled value (PCV).
PCV is needed in order to control the Fei USD stablecoin and ensure its binding to the dollar. Ignas shared how the “peg backing mechanism works.”
Ignas also talked about the very successful merge of Fei Protocol and Rari Capital, which led to the creation of so–called “Fuse pools” — “permissionless lending pools, <…> that allow anyone to create a pool to supply and borrow any ERC-20 asset.” The main goal of the Fei and Rari alliance was to find a solution to “one of DeFi’s major problems is bootstrapping liquidity for new projects.”
The union was very successful and brought the companies more than $2 billion. But, in April 2022, the companies began an inauspicious streak. “Fuse pools were hacked for $80M USD.”
A full analysis of the hacker attack was carried out by Rekt. The vulnerability was a forked Compound code, which uses Rari.
“Rari uses forked Compound code, which doesn’t follow the check-effect-interaction pattern, and has led to a number of re-entrancy incidents: CREAM, Hundred, Voltage/Ola.”
Hackers extracted about $80 million from seven Fuse pools. “After the hack, $TRIBE holders voted AGAINST using PCV for the hack victim payment.”
It was a hacker attack, according to Ignas, that has become the main reason for why the Fei protocol will be closed. Tribe DAO, in turn, put forward a proposal for further growth. It contains the following items:
- FEI redeems for $1 (1 DAI)
- Fuse hack victims receive payment making most victims whole
- TRIBE holders can redeem for pro rata share of remaining DAO controlled assets
- All Governance powers are removed
Finishing the thread, Ignas says that another reason for the closure of Fei was the PCV model.