The decentralized finance industry has seen its fair share of mishaps, either due to human error or otherwise. As a result, the demand for regulation has never been higher, although it may not necessarily have the expected results.
An example to think about
People who have been keeping tabs on the DeFi space know that protocols can come and go in an instant. Although there have been many hacks, thefts, and phishing attempts, some projects are being halted for various reasons. One such example is the Fei Protocol, which is still worth $47 million through the FEI stablecoin. These numbers may relate to a health project, although things are not as black and white as they might seem.
The $47 million DeFi protocol is quite astonishing, especially in the current macroeconomic conditions. However, Fei Labs – the team behind the Fei Protocol – thinks it’s best to throw in the towel.
The group must be taken into account $1.3 billion raised in Ether to build their own decentralized stablecoin. Even at the current valuation, the value of the project is much lower than the amount raised. The funds were used as collateral for the FEI stablecoin, indicating that everything was put into the project one way or another.
However, FEI is not the same as DAI, the original stablecoin of Ethereum. Various crypto assets support each FEI, but the Fei protocol owns these assets. Users are actively selling their cryptocurrency to get a stablecoin instead of borrowing against their assets with higher collateral.
All acquired crypto assets are included in the protocol Control Protocol Value (PCV) “Cellar.” This approach creates an advantage, as the assets in the PCV can either be used to maintain a dollar FEI connection, farm revenue, or create value for the FEI.
Nothing mentioned so far would lead one to believe that Fei Labs or its protocol is in immediate danger. Sure, the ratio of market capitalization to the ratio of funds raised isn’t astounding, but it’s not insurmountable either. In addition, Fei Protocol merged with Rari Capital in December 2021 in the largest DAO-on-DAO merger to date. Another strong move, but things started to fall apart soon after.
Have you become too big to fail?
The merger with Rari Capital provided further benefits to FEI. Rari Capital allows for the creation of unauthorized lending pools, called Fuse Pools. It was a popular concept that would help initiate liquidity for new DeFi projects, and FEI would provide a stable initial liquidity asset.
It had all the signs of a strong partnership that could take decentralized finance to the next level, even if things didn’t go according to plan.
Despite having about $2 billion in cash — much more than what Fei Labs initially raised — the various usage pools have taken a huge hit. It is estimated that the net loss is close to $80 million, which is problematic, but it is a minuscule amount compared to total liquidity. With sufficient liquidity, the “bad debts” can be paid off, and the affected users will be made full. Oddly enough, the owners of TRIBE – the parent governing the Fei protocol – voted against replacing affected users via PCV.
9/ After penetration, $ dynasty Owners voted against using PCV to pay a hack victim.
In June, Rare Capital’s CEO announced his resignation. https://t.co/tJ5bdBTazK
– Ignatius | DeFi Research (DefiIgnas) August 20 2022
Although the community has the right to vote against such a proposal, the DAO voted to make users full a month ago. This difference caused a lot of confusion and forced the resignation of CEO of Rari Capital Jai Bhavnani. This in itself was interesting, although TRIBE holders had grown tired of Rari Capital prior to this decision. They also put forward suggestions for Stop gaining partners from Rari, The Fei Protocol Alliance was put under enormous pressure.
Resignation letter from Rare CEO https://t.co/08mj6xpYhT
– banteg (bantg) June 12 2022
Fast forward to today, and the Fuse hack is still one of the reasons for closing the Fei protocol. But the team also notes “macro-environmental challenge factors” and “increased technical, financial and future regulatory risks.” However, there is still a lot of crypto-asset value in PCV, and the victims of the Fuse hack are still waiting for their cash.
tie loose ends
TRIBE DAO members have to make important decisions. An offer that allowed the hedge to recover all outstanding recoverable FEIs in favor of the DAI. In addition, the value of the control protocol will not be shared in cultivation strategies, and TRIBE holders will receive their fair share of various assets.
The big question is whether or not PCV funds – assuming they are distributed to Tribe DAO members – will be dumped into the market. This represents approximately 115 million ETH and a few million more in other assets.
However, there are still many questions about where the rest of the $2 billion in cash – provided by the Rari Capital x Fei Protocol partnership – has gone. The value of some of them may have fallen due to bearish crypto markets, but that cannot be the full explanation.
Will the regulations paint a clearer picture?
Incidents like the Fei protocol suggest that decentralized finance may need more regulation. While it is good to see the systems in place for distributing PCV to DAO participants, it is only part of the equation. Finding out where the $1.8 billion in cash has gone is even more urgent. Unfortunately, no one has an answer to this question, which leaves plenty of room for speculation and finger-pointing.
In an unregulated industry like decentralized finance, loose ends should always be restricted. This is often easier said than done, unfortunately. This would prevent the founders of the project from pulling money from the protocol they put in place before pulling the plug a year later. While it is impossible to determine whether this happened with the Fei Protocol or his alliance with Rari Capital, it is still a possible outcome. It seems like a lot of money has disappeared into thin air, and no one has a solid explanation for it.
Moreover, it is not reasonable to cite “increasing regulatory pressure” as an excuse in 2022. There are many ways DeFi becomes compliant with regulations, including through Phree, which enables regulatory compliance at the protocol level. Every project and protocol developer has an ethical obligation to find out these things before collecting money from users. With Phree, it’s easy to become compliant and don’t worry about it in the future, as compliance at the protocol level will adapt as the landscape evolves.
CryptoPotato had a chat with Jason Dennehy, Phree co-founder and CEO. According to Jason:
“DeFi has the potential to break into mainstream finance and serve millions of disadvantaged consumers. For that to happen, DeFi 2.0 must be more accountable and compliant, following core standards of KYC/AML, risk disclosure, asset/liability matching, data protection etc. Without these table stakes, DeFi will simply be limited to serving the local crypto community only.”
Regulation will not solve all possible scenarios, but it can help reduce the number of failed DeFi projects. In addition, it gives users recourse in the event of a hack or theft, rather than staying in the dark for months. The future of DeFi still looks bright, but crucial changes will prove necessary.
Would a DeFi post have fewer failed projects if it had a better organization? (Opinion) First appeared on CryptoPotato.