Motivation

There are a variety of reasons for the protocol to increase its DAI holdings in the short term. In addition to DAI being the main asset used by FEI’s current peg mechanism, many upcoming FEI initiatives could increase the protocol’s need for DAI (see the four reasons listed here).

Fei Protocol has the ability to use all of its DAI, LUSD, ETH to support the FEI peg through PSM contracts. Only the FEI-DAI PSM is currently activated because this allows FEI to utilize DAI’s very tight peg for highly efficient peg maintenance. Unlike the FEI-DAI PSM, the FEI-LUSD and FEI-ETH PSMs rely on oracles that suffer from possible precision issues and MEV-sandwiching issues.

Rather than using the FEI-LUSD PSM, it would be more efficient to convert LUSD to DAI as needed. Under current market conditions the protocol can do this on-chain with deep liquidity + low slippage on Curve.

This can be performed in an automated fashion using sentinels 2. Sentinels are automated tasks that can be set to perform various PCV maintenance operations when certain conditions are met. Combined with the PCV collateralization oracle that tracks all PCV deposits on-chain, a sentinel can be triggered to act when assets balances cross some threshold. Here the sentinel would be activated to liquidate LUSD for DAI when DAI reserves fall too low.

Specification

Create a PCV sentinel with the following parameters:

• Whenever the PCV has less than 5M DAI remaining, liquidate 5M LUSD for DAI on Curve
• Revert the transaction if the realized price is < 99.5% of the LUSD-USD Chainlink oracle price
• Revert the transaction if the realized price is < 0.995 LUSD per DAI
• Ratelimit this operation to once per hour