Overview
Fei Protocol launched in March 2021 with a novel approach to decentralized stablecoins: Protocol Controlled Value (PCV). Instead of users depositing collateral that they could withdraw (like Maker/DAI), Fei's genesis event collected ETH permanently into a protocol-owned treasury. The protocol then used this treasury to maintain FEI's $1 peg through direct market operations — buying FEI when it traded below peg and selling when above.
The genesis event was wildly successful — and immediately problematic. Approximately $1.3 billion in ETH poured into the launch, but FEI immediately lost its peg and traded at $0.70-$0.90 for weeks. The "direct incentive" mechanism that was supposed to discourage selling below peg (by burning a penalty from sellers) actually trapped users: selling FEI below peg incurred a penalty, but the peg wasn't recovering, creating an inescapable loss situation. Users called it a "trap" and community backlash was severe.
The team pivoted by removing the direct incentive mechanism and implementing standard redemption mechanics. FEI eventually stabilized, and the protocol accumulated significant PCV (~$800M+ in ETH, stablecoins, and DeFi positions). In late 2021, Fei merged with Rari Capital, an undercollateralized lending protocol, in a governance token merger — combining Fei's treasury with Rari's Fuse lending pools.
This merger proved catastrophic. In April 2022, Rari Capital's Fuse pools were exploited for approximately $80 million through a reentrancy vulnerability. The exploit drained funds from Fuse pools, including PCV that Fei had deployed there. The aftermath was acrimonious: a governance vote on whether to reimburse Fuse victims passed, but implementation was contentious and slow.
Facing mounting challenges — the Fuse exploit, declining DeFi activity, team fatigue, and community division — Fei Protocol began winding down in 2023. The protocol allowed full FEI redemption against remaining PCV, and the DAO distributed its treasury to TRIBE (governance token) holders. The shutdown was orderly: no users lost access to their funds, and FEI was redeemable at par. It was, by DeFi standards, a clean death.
Peg Stability
FEI's peg stability was a rollercoaster. The launch disaster saw FEI trade 20-30% below peg for weeks, trapped by the direct incentive mechanism that punished sellers. After the mechanism was removed and standard redemption implemented, FEI maintained its peg reasonably well — the large PCV backing provided genuine collateral support.
During normal operations (mid-2021 to early 2023), FEI's peg was stable, supported by the protocol's ability to deploy PCV for market operations. However, periods of stress (the initial launch, the Rari exploit aftermath, the wind-down announcement) saw temporary depegging events.
The peg mechanism ultimately worked when backed by sufficient collateral (PCV exceeded FEI supply), but the original algorithmic elements (direct incentive) failed completely. Fei's journey validated a simple truth: stablecoin pegs work when backed by real value and break when backed by mechanisms.
Collateralization
Fei's collateralization through PCV was its strongest feature. At peak, the protocol controlled over $800 million in assets — primarily ETH, stablecoins, and DeFi positions — backing FEI supply. The collateralization ratio typically exceeded 100%, meaning the protocol held more value than outstanding FEI.
The PCV model was genuinely innovative: protocol-owned (not user-deposited) collateral that the DAO could actively manage. This allowed Fei to earn yield on reserves, deploy capital for market operations, and maintain collateral without depending on user deposits.
However, PCV concentration in volatile assets (ETH) meant collateralization ratios fluctuated with market prices. The Rari Fuse exploit destroyed approximately $80M in PCV, directly reducing the backing ratio. The decision to deploy PCV into Rari's lending pools — which were known to have aggressive risk parameters — was a catastrophic treasury management failure.
Security
Fei's security record is marred by the Rari Fuse exploit. While Fei's own core contracts were not exploited, the merger with Rari Capital exposed Fei's PCV to Rari's security risks. The April 2022 Fuse exploit used a reentrancy vulnerability to drain approximately $80M from multiple Fuse pools, including pools holding Fei's PCV.
The core Fei contracts (minting, redemption, PCV management) were audited by OpenZeppelin and other firms and operated without major vulnerabilities. The security failure was not in Fei's contracts but in the governance decision to merge with and deploy capital into Rari — a strategic rather than technical failure.
The Rari merger effectively transferred Rari's security risks to Fei's treasury, and those risks materialized with devastating consequences. This underscores that smart contract security extends beyond your own contracts to every protocol where you deploy capital.
Decentralization
Fei Protocol operated through TRIBE token governance with reasonable decentralization. Major decisions — including the Rari merger, the Fuse victim reimbursement vote, and the wind-down decision — were made through on-chain governance votes. The process was sometimes contentious (the reimbursement vote was particularly divisive) but genuinely decentralized.
The wind-down was itself a governance decision, with TRIBE holders voting to distribute remaining PCV and shut down the protocol. This represents one of the cleaner decentralized shutdown processes in DeFi history — not a rug pull or abandonment, but a deliberate community decision to return capital.
The team (led by Joey Santoro) was transparent throughout, even when delivering bad news. The quality of the shutdown process partially redeems the project's troubled operational history.
Adoption
Fei Protocol achieved moderate adoption during its operational period. FEI circulating supply reached hundreds of millions, and the stablecoin saw meaningful integration in DeFi protocols (Curve, Balancer, lending platforms). The PCV-backed model attracted users who valued the over-collateralization guarantee.
However, adoption never reached the scale needed to justify the complexity. FEI competed with DAI, FRAX, and LUSD for the decentralized stablecoin market, and its troubled history limited growth. The wind-down has reduced adoption to zero — FEI is no longer issued or actively used.
Risk Factors
- PROTOCOL HAS WOUND DOWN. FEI is no longer actively issued or maintained.
- $80M Rari Fuse exploit destroyed significant PCV value.
- Turbulent launch — initial peg failure trapped early users.
- Rari merger was a strategic mistake that imported security risk.
- TRIBE token value — distributed remaining PCV but no ongoing protocol.
- Historical lesson only — the protocol has no future operations.
Conclusion
Fei Protocol is a study in DeFi's best and worst instincts. The PCV model was genuinely innovative — protocol-owned collateral managed by governance was a powerful concept. The execution was repeatedly undermined: by a punitive launch mechanism that trapped users, by a merger that exposed the treasury to a catastrophic exploit, and by the relentless grind of maintaining a stablecoin in a bear market. The 3.8 score acknowledges the innovation and the clean wind-down while reflecting the failures that made shutdown necessary. Fei's legacy is the PCV concept, which has influenced subsequent protocols, and the lesson that merging with a less-secure protocol is like opening a door in your firewall. Study Fei for the ideas; learn from it for the mistakes.