Lessons from the Tribe DAO

Written by Cooper Duschang: Co-Director of Research, Co-Director of Governance

Introduction:

Decentralized Finance encompasses blockchain’s preachings of “falling down the rabbit hole”. There is an ever-growing number of protocols providing services including liquidity provision, perpetual trading, and fund management. With this growth also comes the liquidation of other protocols. The Fei Protocol and Tribe DAO were unfortunately one of those DeFi projects that is winding down, giving back treasury assets to participants, and ending development on the current products.

Fei Protocol provided a decentralized stablecoin, an alternative token to the decentralized DAI stablecoin or centralized USDC and USDT stablecoins. Like its peers, FEI was pegged to the U.S. Dollar, working to maintain a 1:1 ratio A majority of users deposited DAI into Fei’s PCV to receive FEI for alternative yield opportunities and liquidity pool deposits. Fei’s Protocol Controlled Value (PCV) was reinvested into other lending protocols including Compound and Aave, providing a source of revenue instead of having assets sit idle in the protocol’s treasury.

The Tribe DAO emerged after Fei voted to acquire Rari Capital. The Tribe DAO was composed of 4 protocols: Fei Protocol, Rari Capital, Midas Capital, and Volt Protocol. Tribe DAO supported development on these various protocols to provide a variety of products to users. Aside from fiscal support, the Tribe planned to support Rari and Midas with development and Volt with governance. Tribe hoped to address a users’ every need with decentralized lending pools, cross-chain pools, inflation-hedged tokens, and a stablecoin that rivaled its peers.

With the Tribe DAO winding down, repaying Rari hack victims, and distributing remaining PCV to Tribe holders pro rata, we examine Tribe DAO actions that were beneficial and actions that hindered Tribe’s growth from a data-driven standpoint.

PCV Holdings

Fei’s PCV was exposed to a variety of assets. Acquiring these tokens consisted of multiple DAO token swaps including Olympus DAO, staking Ethereum on Lido Finance in preparation for The Merge, or acquiring tokens for Compound Finance meta-governance. Fei was subject to risk from poor investments from dozens of tokens in the PCV, risking the collateralization ratio for outstanding FEI.

Llama DAO was paid $119,500 in funds from the Fei Grants Program to provide financial data for the DAO. In one of its Dune Analytics Dashboards, they provided PCV breakdown, showing as early as March 2022 that Tribe held 28 different tokens. At PCV’s peak in early April, the protocol had more than 7 tokens that made up less than 1% of Protocol Controlled Value. Fei Protocol’s exposure to such a variety of holdings is unnecessary for a decentralized stablecoin attempting to maintain a stable collateralization ratio.

Fei Protocol attempted to create multiple partnerships through various financial agreements. FIP-79 solidified a token swap with Olympus DAO, swapping for 1% PCV-worth of gOHM in an attempt to align plans on growing together in the DeFi space. gOHM’s price at the date of proposal was around $5,400. Currently it is less than $2,500, a 53.7% decrease in price.

It is understandable for Fei to diversify its PCV assets, similar to investing in traditional markets by buying multiple different company shares for a broader market return; however, Fei is a stablecoin project that requires a collateralization ratio to maintain its peg and cover any liquidity issues it may face in market downturns. This led to FIP-111 which proposed to increase the amount of stablecoins held in the PCV and narrow market exposure. Having a higher stable backing would decrease the volatility of the collateralization ratio which is based on the value of the PCV. As FEI is minted, the PCV increases; however, when that PCV holding is not a stablecoin, the token is exposed to higher volatility and impermanent loss, risking decreasing the value of the PCV. A less volatile collateralization ratio would help maintain Fei’s peg to the U.S. Dollar. The Snapshot vote received support for a 90–100% stable backing as the Tribe DAO proceeded to protect and maintain its peg to the U.S. Dollar.

While FEI was still struggling to maintain its peg in comparison to its competitors, voting to increase the stable backing of the token was in-line with its goals as a stablecoin. The PCV had exposure to DAI, LUSD, and FRAX, providing some stable backing to its peg and collateralization ratio.

Acquisitions

Fei’s acquisition of Rari Capital was a big moment for the DAO space in terms of M&A activity and included lessons on how to manage new protocols and a larger community. This was seen as a great combination: a decentralized stablecoin and a decentralized peer-to-peer lending pool product. One protocol was able to provide liquidity for another, a great match. However, Rari Capital’s discord was still separate from Fei after the merge, having no clear central location for discussion about both protocols or fuse pool development announcements for Fei discord. In its acquisition deal, Fei agreed to pay Rari Capital hack victims over $12 million from a previous hack. As Fei had agreed to purchase Rari’s assets of decentralized fuse pools, developers, and its liabilities, it was purchasing $12 million in bad debt, unrecoverable by victims. Unfortunately, in Llama DAO’s Q1 2022 financial reports, the team released revenues generated by Rari Capital three months after the acquisition. In its report, Rari revenue and yields had generated a total of $519,949. Regardless of the hack repayment price, fuse pools were not being adopted as fast as expected. Assuming average monthly revenues of ~$173k, the fuse pools would require 6 years to break even on its initial acquisition cost, ceteris paribus.

Llama DAO reported Rari Fees generating less than $1 million in income for the Tribe DAO. Fuse pools were more of a financial liability requiring smart contract verification and developer maintenance. FEI and TRIBE users would not be able to generate as much yield from this investment as expected because of a lack of demand for this peer-to-peer technology.

Bruno and Eswak, two contributors to the Fei Protocol noted their fear about the merge as Rari had claimed an annual revenue of $7 million in fees. After Llama DAO’s 3rd party audit three months after the acquisition, financial metrics showed these initial claims were inaccurate. This merge hurt Fei Protocol and eventually caused Tribe to repay a second hack event. Now that accurate financial statements have been revealed, it is unfortunate to see how the merge was handled with inaccurate claims and hurt Fei Protocol in paying off now two of Rari Capital’s fuse pool hacks. The second fuse pool hack was a catalyst for the Tribe DAO’s unwinding, but more due diligence was required when acquiring Rari. Tribe’s PCV invested time, money, and labor into a product that generated minimal revenue and was actually a large liability.

Investments

Despite multiple flaws in the Tribe DAO, one of the attributes of Fei that was beneficial to the protocol was its use of Protocol Controlled Value (PCV). This metric was similar to Total Value Locked (TVL) but provided Fei control over the deposits, allowing allocation to various investment pools and governing powers among the token holdings. Having this control is the difference between putting money into a checking account and receiving no return and investing in the S&P500 and receiving an annualized return of ~10%. Tribe’s investments into various protocols created risk to impermanent loss when providing liquidity to pairs; however, it also generated strong investment revenue for the protocol. In Llama DAO’s 2022 Q1 Report, Fei had generated a 10% return from its $9.81 million in assets deposited into Uniswap, generating $1.07 million in revenue. PCV allocation overall generated in excess of $5 million in the first quarter.

Tribe benefited from providing liquidity to protocols including Lido Finance, Convex, and Uniswap. These 3 investments helped increase the PCV for Tribe and use it to further invest in grants programs, funding for internal programs, and community maintenance.

Llama DAO broke down the PCV performance per deposited protocol. Despite large losses from Balancer, a majority of deposits were positive for the quarter. Regardless of the amount invested in each protocol, Fei’s investments were profitable and generated on average more than Rari Capital’s fuse pool fee revenue, showing sustainability in external investments.

To be able to deploy capital into these yield-generating protocols, Tribe was required to have certain tokens to enter investments. Does Tribe’s investment income contradict the data for increasing the stable backing? Is it better to remain diversified to invest in other protocols? In future projects, a potential solution to these strategies could be to separate investments from collateralization for a stablecoin. A percent of PCV should be allocated to lending pool investments rather than mixing collateralization ratio money with acquisition money with investment money.

Conclusion:

The Tribe DAO has been a great experiment in the crypto ecosystem, demonstrating the capabilities of protocols and contributors as well as where efforts can be focused and where regulation is needed. The liquidation of Fei Protocol took time coding smart contracts and voting how to simplify PCV holdings for later user redemption.

Data was limited by the information available from contributors, tracked wallet addresses, and dashboards created by third-party funded auditors. The above suggestions are part of a larger scope of data and qualitative aspects that led to Fei’s liquidation and Tribe’s unwinding. We found that these three components ‒PCV holdings, acquisitions, and investments‒ of the Tribe DAO provide great suggestions for continuing to find how to optimize the benefits of DAO funds and returns for users and holders.

Had FEI had a higher stable backing earlier, there may have been less reason for worry after the Rari hack, allowing the stablecoin to continue to prove itself in the DeFi space and not also be impacted by market fluctuations. A lack of development and absence of core contributors certainly decelerated Tribe DAO’s progression. Fei initially had a strong developer base as it onboarded Rari Capital developers to work on improving fuse pools and incentivized new developer training with FIP-83. Had the fuse pool hack and market downturn not occurred, Tribe may have been able to continue development in its other three protocols or increased marketing efforts for users to adopt FEI as a stablecoin alternative.

Participating in NEU Blockchain’s Governance for Fei Protocol has been a rewarding experience. We’ve found that communication is difficult amongst holders and teams with multiple agendas to consider. Governance has given us better insight into the DeFi space and DAO process. It requires dedication and a clear vision of objectives in order to contribute. We plan to continue to be active in sharing our thought process across other governance protocols and proposals. We also hope to contribute more tangible progress to the development of projects and research-paired suggestions.

Written by:

Cooper Duschang

Co-Director of Research, Co-Director of Governance