Discovering Fei Protocol Through the Valuation Model
Marcel Deeron September 19, 2022.
Fei Protocol is a project that seeks to provide a solution to the problems associated with stablecoins. It’s a reserve-backed stablecoin that’s pegged to the US dollar. Being the pioneer for Protocol Controlled Value (PCV), Fei has the capability to take ownership of the collateral it receives for minting FEI. Additionally, its development team is now more empowered to realize its goal of creating a truly decentralized, highly scalable stablecoin with Fei V2.
Fei V2 Release
The start was rocky—not long after its launch, the peg was at a very low $0.71. This showed the team that the first peg mechanism wasn't sustainable. Following that, Fei V2 was released in October 2021.
In Fei V2, $1 of FEI can be exchanged for $1 of the assets that the Fei protocol controls. Additionally, it's based on two tenets that Fei considers crucial: stability and incentive alignment.
This valuation model offers TRIBE at a price range of $0.41 to $1.00. May 1, 2022 is used as the valuation date to account for the UST de-peg.
- Adjusting the PCV allocation
- Modifying protocol parameters like the target reserve ratio
The genesis group, community, core team, investors, staking incentives, and grants were allocated 1 billion TRIBE tokens with linear 4-year vesting for investors and 5 years back-weighted vesting for the core team.
Current Stablecoin Landscape
Centralized stablecoins, such as Tether (USDT) and Circle’s USDC, have gained fame by eliminating price volatility and enabling instant transactions. For decentralized stablecoins, there’s TrueUSD and MakerDAO's DAI.
Stablecoin models have their strengths and drawbacks:
- Stablecoins backed 1:1 by fiat, like USDT and USDC, are centralized, making users opt for more transparent solutions, which creates a regulatory concern.
- Stablecoins backed by crypto, like DAI and LUSD, are capital inefficient. The stablecoin supply is limited by the demand for ETH-backed loans.
- Basis Cash and ESD are dependent on supply incentives. If the stablecoin trades below its peg, discounted bonds can be traded for it, which fails to preserve the peg.
Fei protocol uses its ecosystem to deliver DAO services. Significant initiatives are:
- Liquidity-as-a-service: Fei protocol and Ondo collaborated to provide projects the option to deposit their token into an Ondo liquidity vault, and Fei would match that deposit with an equivalent quantity of FEI.
- Tribe Turbo: With compatible tokens as collateral, this service enables users to borrow freshly minted FEI at 0% interest.
- xTRIBE: xTRIBE immediately converts staked TRIBE into xTRIBE for governance participation when TRIBE is locked.
Fei creates funds via liquidity provision, PCV, and FEI yields. Since the Tribe DAO governs the protocol, staking rewards and buybacks accrue to TRIBE holders. These circumstances allow for conventional token valuation.
Discounted Cash Flow
It's important to consider the impact of PCV growth on the value. The more liquidity it can provide and the higher yield it can generate, the greater its value.
Following a 10-year forecast period and factoring for cash flow with a terminal value, there are three scenarios for PCV increase. The terminal rate is set at 5% to allow for scenario analysis and the calculation of TRIBE's probability-weighted valuation.
PCV grows at an annual rate declining from 50% to 10%. This implies a slowdown of the DeFi market or Fei losing market share from its competitors.
PCV's annual growth rate decreases from 75% to 10%. The base case implies PCV will continue on its current trajectory and drop from its annualized average increase of 78% as the project matures. This average excludes the launch's remarkable spike when major institutional investors joined.
PCV's annual growth rate drops from 100% to 10%. To reach these growth levels, Fei must become the top decentralized stablecoin.
The protocol's balance sheet also includes FEI. PCF can provide liquidity and yield. To minimize complicating the model, collateralization ratio is used. It represents the amount individuals would get if all UCF is redeemed pro-rata for PCV. As the protocol scales, the ratio is anticipated to hit 100%. By fixing PCF over UCF to 65%, the protocol's FEI can be computed.
Rari Capital Merger
The merger of Fei Protocol and Rari Capital means that we need to take into account the money market's fee income. Rari Capital has a 10% platform fee on interest earned by Fuse depositors, which is $2.36 million per year.
Given all this data, we arrive at a valuation of $359.2 million, or $0.79 for each TRIBE in circulation.
Six comparable stablecoin projects were chosen for this analysis.
- Frax Protocol: Frax Protocol is a stablecoin protocol that uses a combination of collateral and algorithms to stabilize the price. It also uses a dual-token system.
- USD Coin: As the second-largest fiat-collateralized stablecoin, Fei aspires to acquire USDC's market share as a decentralized alternative.
- Olympus DAO: Despite the fact that it is a non-pegged stablecoin protocol, it's a competitor to Fei.
- Reflexer: This ETH-backed, non-pegged stablecoin system introduces less volatile reflex indices.
- Maker DAO: This is the largest decentralized stablecoin protocol, where users can mint Dai with ETH loans. Fei’s goal is to outperform Maker DAO.
- Liquity: Over-collateralized stablecoin protocol that lets users borrow LUSD with ETH. Minimum collateralization is 110%.
The two valuation multiples show that Fei might be undervalued given that it trades below the average price-to-sales and price-to-earnings of 24.21x and 21.28x. We estimate an implied valuation for TRIBE of between $0.41 and $0.58 overall.
Users can exchange FEI for PCV reserves 1:1, so taking the user-circulating FEI out of the PCV reserve provides the liquidation value of TRIBE.
At the time of valuation, protocol equity was valued at $363 million, or $0.80 per TRIBE token. Due to PCV reserve volatility, liquidation value is determined over two months, varying from $0.67 to $1.05. The TRIBE cryptocurrency is consistently trading below its liquidation value.
Given all this, results show a price range of $0.41 to $1.05 for TRIBE.
Fei's vision of creating a decentralized ecosystem for stablecoins is fundamentally sound, and if it can deliver on its vision, it will be a true disruptor in the industry.