Price volatility is the norm in crypto markets, but last week saw the price of decentralized finance (DeFi) project Iron Finance’s Titanium (TITAN) token plummeting — from US$64.19 to zero — in a single day.
Even American billionaire investor Mark Cuban — who had endorsed TITAN in a blog post just days before — was not left unscathed by the token’s crash, taking to Twitter to say “I got hit like everyone else. Crazy part is I got out, thought they were increasing their [total value locked] enough. Than Bam.”
“BTW I wasn’t a backer. I was a liquidity provider. I made money in one [liquidity pool] and then lost money during the bank run on the a second,” said Cuban in another tweet replying to American economist Steve Hanke. Earlier, Hanke had tweeted: “#DeFi tokens are the latest cryptos to take a nose dive. Like @mcuban-backed #TITAN, more and more cryptos will bite the dust and reveal that they are nothing more than highly speculative assets with fundamental values of ZERO!”
Before Titan token’s dramatic collapse, Iron was seeing exponential growth in total value locked, rising from US$30 million on May 20 to US$1.2 billion on June 12.
How did Iron Finance investors, even a supposedly savvy one like Cuban “get rekt,” in crypto parlance — suffer a heavy financial loss caused by a wrong trade or investment.
What actually happened?
Iron is a partially collateralized stablecoin, soft-pegged to the U.S. dollar, on the Polygon network and Binance Smart Chain, according to its website.
Stablecoins, which are typically pegged 1:1 to fiat currency, are cryptocurrencies that are designed to minimize price volatility. They act as a bridge between traditional finance and crypto and allow traders to stay in the crypto ecosystem when hedging against price declines.
Some stablecoins like USDC say they are 100% fiat-backed, while others, like USDT, are backed by a basket of assets — including unsecured debt — with cash only as a tiny portion. Others, like Dai, are backed by crypto assets. Then there are algorithmic stablecoins like Iron that have a multi-token collateral mechanism using time-locked smart contracts to maintain price stability.
In the case of Iron Finance, USDC and TITAN were used as collateral on Polygon and BUSD and STEEL on the Binance Smart Chain. Basically, the price of TITAN goes up when new IRON tokens are minted, and the peg becomes less stable when the price of TITAN falls, like what unfortunately happened on June 16. The price of IRON has dropped from its US$1 peg and is now trading for just US$0.77 as of publishing time, according to CoinGecko.
Iron Finance says the crash was not a rug pull — a malicious tactic where crypto developers abandon the project and run away with investors’ money — but poor tokenomics resulting in “the world’s first large-scale crypto bank run.” The project detailed the sequence of events that unfolded in a post-mortem blog post:
- June 16, around 10 a.m. UTC: Iron Finance “noticed some whales began to remove liquidity from IRON/USDC, then sold TITAN to IRON and then IRON to USDC directly to liquidity pools instead of redeeming IRON, which caused the IRON price off-peg. TITAN dropped from 65$ to 30$ in 2 hours, which later recovered in 1 hour to 52$ and IRON fully recovered its peg.”
- June 16, around 3 p.m. UTC, “a few big holders started selling again. This time, after they started, a lot of users panicked and started to redeem IRON and sell their TITAN. Because of how the 10mins TWAP oracle works, TITAN spot price drops even further in comparison to the TWAP redemption price. This caused a negative feedback loop, as more TITAN was created (as a result of IRON redemptions) and the price kept going down.”
- “At some points, the price of TITAN became so low, close to 0 actually, which caused the redeem contract to revert the redeem transactions. We already queued the fix for this, so people can redeem again at 5pm UTC.”
Is stability for stablecoins possible?
TITAN’s untimely collapse has turned a harsh spotlight on the rise of algorithmic stablecoins in DeFi, and some questioned whether Iron Finance could have done more to prevent the bank run.
Sam Kazemian, CEO of FRAX, a fractional-algorithmic stablecoin project, said in an email to Forkast.News: “Iron forked the very basic V1 of FRAX with 0 of the safeguards we had built into the system to prevent a bank run. They tore out all the game theory code that would have blunted hyper growth so that they could pump $2TVL and advertise themselves as bigger+better than FRAX.”
Many of TITAN’s predecessors such as Empty Dollar Set (ESD), Dynamic Set Dollar (DSD), Ampleforth (AMPL) too, are now trading off the peg.
Do Kwon, founder and CEO of Terraform Labs, which created Terra, an algorithmic stablecoin project wondered on Twitter: “So why have they failed? Is algorithmic stability too hard?”
“New algo stablecoins have all failed because they solely rely on recursive holding incentives for growth. That is: If you hold the stablecoin, we will let you farm more stablecoins,” Kwon tweeted. “This leads to a feedback loop where capital flight compresses both the value of stablecoins and the holding yield, increasing both principal risk and lowering returns to compensate. Death spiral.”
Kwon adds the challenge for algorithmic stablecoin developers is building sustainable use cases around the stablecoins and “stability will increase as these use cases become more sticky, distributed and uncorrelated.”
Mark Cuban has called for stablecoin regulation in the wake of the TITAN collapse, telling Bloomberg in an email: “There should be regulation to define what a stable coin is and what collateralization is acceptable.”
In Asia, Thailand’s central bank has issued policy guidance requiring Baht-backed stablecoins to consult with the bank for consideration before beginning any operations.
But ultimately, investors must do their own due diligence. In the Wild West that is still large swaths of crypto, let the buyer beware.
“It’s really on me for being lazy,” Cuban said to Bloomberg. “The thing about de fi plays like this is that its all about revenue and math and I was too lazy to do the math to determine what the key metrics were.”
Michael Conn, CEO and chairman of Zilliqa Capital, told Forkast.News in an email: “Algorithmic stablecoins such as $IRON/$TITAN are typically built in a vacuum where in theory everything goes up. Most cannot perform in a severe stress test environment. In this case, the arbitrage to the downside led to a death spiral for $IRON when the bottom fell out on the $TITAN token.”
Conn also shared some advice worth heeding: “The message for anyone considering an investment such as this is to do your own research and to not just go into FOMO driven investing.”