Amid “mounting technical, financial, and future regulatory risks,” the team behind Fei, the 17th largest stablecoin by market capitalization, is ready to call it quits.
But their proposal, which would only partially repay victims of an $80M hack and compel Fei holders to redeem their tokens for DAI, the largest decentralized stablecoin, has been met with fury from some of the project’s earliest backers.
Shortly after the proposal went online Friday, Sam Kazemian, the founder of Frax Finance and an early Fei supporter, called it “a new low for DeFi.” Fei co-founder Joey Santoro is yet to respond to The Defiant’s request for comment.
Critics say the Fei protocol has the money to fully reimburse everyone that lost money in the April 30 hack. Instead, skeptics claim that the team has proposed a partial redemption for hack victims while retaining much of the project’s remaining capital for themselves.
Protocol Controlled Value
Fei debuted in the spring of 2021, one of the industry’s few purely crypto-backed, algorithmic stablecoins. It introduced the concept of “Protocol Controlled Value,” the premise of deep liquidity that is owned and managed by the protocol – a sharp difference from other systems where liquidity can be removed at any time.
The launch itself was marred by a contract bug that was soon followed by FEI trading under its $1 peg. Rewards for minting new FEI were turned off while users who attempted to sell FEI under $1 were penalized. Fei raised an astonishing $1.3B in ETH, which was deployed as FEI-ETH liquidity on Uniswap, making it the largest pool on the DEX at the time.
Last year, Fei’s parent organization, TribeDAO, merged with decentralized lending protocol Rari Capital. RARI holders were offered the chance to swap their tokens for TRIBE. Then, on Apr. 30, Rari was hit by a re-entrancy attack, resulting in a loss of $80M worth of crypto from the protocol’s lending pools.
In May, holders of TRIBE, the combined entity’s governance token, overwhelmingly voted to “make the community whole” by “repaying the bad debt on behalf of the hacker,” with the specifics to be hammered out at a later date.
When the specifics were proposed a month later, they were voted down, with many of the “no” votes coming from members of the Fei team. The team maintains that the initial vote was non-binding since it did not take place on-chain.
On Friday, the team put forward its latest proposal, which would, among other things, stabilize FEI such that it could hold its peg to the US Dollar “without the need for governance.”
“The challenging macro environment and specific challenges such as Rari Capital’s Fuse hack have placed the Tribe DAO in a suboptimal state,” it reads. “Any of the mounting technical, financial, and future regulatory risks could cause the project to be far worse off than it is now.”
It also proposes to compensate hack victims using a pool of 57M TRIBE tokens.
Fei estimates that this would be adequate to make hack victims whole, “dependent on the intrinsic value of TRIBE.”
Fei Labs did not provide an estimate for TRIBE’s “intrinsic value” in its proposal. TRIBE was trading at about $0.22 on Monday evening in New York, according to data from The Defiant’s newly released charting tool. That would price the repayment fund at around $12.5M, or barely 16% of the amount stolen.
TRIBE has surged 50% since the proposal was unveiled on Friday.
Fei contributor Jack Longarzo said the repayment fund would be evenly distributed among hack victims, with the amount each receives capped at the amount they lost.
“Given the way this is structured and the current value of the assets in the PCV, almost all addresses will be made whole but a handful of the larger victims will only be partially reimbursed,” he wrote in Tribe’s governance forum.
Elsewhere in the governance forum, critics of the proposal called the refusal to use PCV to repay hack victims “cronyism” and “borderline fraud.”
“My advice to the devs would be to make the victims whole, sell the tokens, and wind it down with whatever honor there is left on the table,” a user going by the name Blacksage recommended. “There CERTAINLY WILL be a lawsuit if it passes in its current form.”
Perhaps in response to community backlash, Santoro later tweeted that “this is just a proposal,” leaving the window open for changes before the TribeDAO finally winds down.