Fei Protocol has two distinct oracles that different components in the system point to. The primary oracle reads the USDC/ETH 10 minute time-weighted average price (TWAP). This oracle uses a snapshot approach, so for each 10-minute interval the peg is fixed from the Fei Protocol perspective. The only contract in Fei Protocol that uses this primary oracle is the bonding curve.
All other components in the system use the secondary oracle, "bonding curve oracle". Pre-Scale, this oracle references the bonding curve price rather than the primary oracle price. E.g., if the bonding curve is at a multiplier of $0.75, then the direct peg incentives on uniswap are targeting the distance from a $0.75 FEI price rather than the long-term intended $1.
An important feature of the bonding curve oracle is the ability to "thaw" from a lower target price up to the target bonding curve price. Thawing is used to mitigate arbitrage opportunities that arise due to Genesis participation.
This type of arbitrage is a general feature of any system which has the following properties:
A group of user transactions are bundled together
There is open participation in the group
There is slippage in the price
The inverse transaction can be made immediately after the bundled transaction
An arbitrageur could participate in the grouped transaction. The average price of the group transaction would necessarily be lower than the very next listing price. The arbitrageur, if first to sell, would capitalize on the spread between these two prices.
E.g., a naive approach to the FEI bonding curve: The Genesis Group makes it to the Scale target with an average price of $0.80. If Fei Protocol immediately lists FEI at the current bonding curve price of $1.00, then an arbitrageur can participate in Genesis expecting to make a 20% profit, if able to sell first right after Genesis.
The implemented thawing solution is to initiate the bonding curve oracle reporting the average Genesis price as opposed to the next bonding curve price. This mitigates any pure arbitrage opportunities for participating in Genesis. The bonding curve will linearly shift towards reporting the intended bonding curve peg price over a 2 week window. This means that all incentives and PCV deposits will apply to this lower price. The peg will gradually increase until the thawing period is over.