The central theses
- Iron Finance’s TITAN, which supports the algorithmic stablecoin IRON, collapsed last night after a massive sell-off.
- The price crash is likely due to IRON’s arbitrage-dependent pegging mechanism.
- The team has denied the rug pull allegations and will allow IRON holders to redeem the stablecoin for USDC.
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Iron Finance’s governance token completely collapsed last night. According to the team, the project’s TITAN token suffered from a bank run after asking users to remove liquidity from all pools.
Iron finance under attack
Iron Finance, a DeFi project issuing a partially secured algorithmic stablecoin called IRON, has suffered a serious incident.
TITAN, the governance token that IRON backed, collapsed last night due to a massive sell-off. The token price plummeted from around $ 60 to $ 0.00000006, according to data from CoinGecko. Meanwhile, the IRON stablecoin is trading at around $ 0.70 (stablecoins like IRON are meant to remain tied to an asset – in this case, that’s the dollar).
The stablecoin was supported by USDC and TITAN in proportions of 75% and 25%. Iron Finance launched on Polygon less than a month ago and quickly pulled in over $ 2 billion in liquidity.
It is still not clear what caused the price to drop close to zero. Many have speculated that the crash could be due to a “rug pull,” a situation where creators get away with user funds locked in smart contracts. However, the team denied these claims. On its website it wrote:
“There are no hacks, no exploits or rug pulling.”
To create an incentive for USDC stakes in its liquidity pools, the project had offered returns of up to 10,000% APY in TITAN tokens. The yield caught the attention of Shark Tank entrepreneur-turned-DeFi enthusiast Mark Cuban, who revealed in a blog post earlier this week that he is growing TITAN. Cuban tweeted that he was “met like everyone else” last night.
The probable cause
TITAN may have crashed due to the stablecoin pegging mechanism. When the price began to fall, IRON lost its dollar peg. As with other algorithmic stablecoins, once the pegging mechanisms come into play, the price should have rebounded. But the situation got out of hand.
According to the pegging system of the protocol, if the price of the IRON token is less than one US dollar (USD), anyone can buy the token and redeem it for a value of 1 USD, divided into 0.75 USD USDC and 0, 25 USD TITANIUM.
This arbitrage mechanism was supposed to be the bracket for IRON, but it was probably the cause of the crash. Yesterday, when the stablecoin was trading below a dollar, arbitrageurs bought and redeemed IRON at a cheaper price. The TITAN tokens were continuously sold on the open market, which led to the price drop.
As people tried to redeem more IRON, panic spread and this resulted in a bank run which meant everyone was trying to redeem their IRON tokens at the same time. The selling pressure continued until the price of TITAN fell to almost zero.
Millennial Finance’s lead developer, z80Ðev, pointed out this problem a few days ago. They write:
What worries me now is the opposite scenario. If $ IRON <$ 1, the opposite arbitrage opens. It becomes profitable to buy $ IRON for <$ 1 and then redeem it for ~ 0.72 USDC and the rest in $ TITAN. Someone who does this is likely to be selling this $ TITAN for USDC
4 / n
– z80Ðev (@ z80dev) June 14, 2021
Iron Finance said it would post an autopsy once it has a better understanding of what caused the sudden collapse. Whether or not TITAN goes to zero, Iron Finance’s vaults still contain more than $ 200 million worth of USDC. The team has promised to allow IRON holders to redeem USDC worth $ 0.748 per token starting tonight.
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