Another day, another decentralized finance (DeFi) protocol has taken a hit.
Not just a DeFi project, but an algorithm stablecoin has ended up crashing. Algorithmic stablecoins use algorithms to balance the circulating supply of the asset, but they have failed to maintain their peg and flourish.
Just last week, Polygon-based DEX QuickSwap Malt Stablecoin (MALT) ended up losing its $1 peg to fall to 0.18.
MALT is a yield farming incentive-centric algorithmic stablecoin that uses bonding LP mechanisms along with Arbitrage auctions to stabilize.
On Wednesday, another Polygon-based algorithmic stablecoin project, Iron Finance’s token TITAN, lost 100% of its value. The price of TITAN rallied above $64 high only to fall straight to zero.
IRON also lost its peg to fall from $1 to $0.615 and now trades at $0.69.
— tilopa (@youngtilopa) June 16, 2021
Iron Finance is a partially collateralized token that is soft pegged to the USD. The project is actually a fork of FRAX stablecoin and popularized by Twitter, especially billionaire investor Mark Cuban, who recently revealed that he had been involved in it.
In a blog post on Sunday, he shared that he has been providing liquidity for DAI/ TITAN on QuickSwap.
Recently, Cuban also joined a panel discussion at the DeFi Summit virtual conference, where he said Polygon (MATIC) is “destroying everybody else” as it is “getting so much momentum,” making it “hard to catch up” for others.
“Valuing tokens is easier and makes more sense than you think” – Mark Cuban, two days before suffering a 99.9% loss. https://t.co/O1Lf31arnj
— Alex Krüger (@krugermacro) June 16, 2021
While it was believed Cuban lost millions of dollars as an LP, he doesn’t seem to have suffered losses.
“I got hit like everyone else. Crazy part is I got out, thought they were increasing their TVL enough. Than Bam,” said Cuban in response to the question if he “rugged CT or himself got rugged on IronFinance.”
Instead of an exploit, the incident seems to be similar to a bank run where people continue to cash out, sending the prices of the token falling until it couldn’t go down anymore.
“Could be an exploit but unlikely, other protocols broke in the same fashion without any bad actor,” noted @0xSisyphus. “Pretty sure the mechanism it broke thru is b/c people sold titan for other reasons, and that meant there wasn’t enough value contained in titan to fully repay the iron holders.”
One failed redemption mechanism and everyone suddenly becomes an algostable Ponzi expert
It has to do with how CR works – the protocol gives u $1 of “value” but a portion of that -25%- is in titan coin. When the Ponzi turns, titan supply rapidly inflates as it loses $ value
— Sisyphus (@0xSisyphus) June 16, 2021
There are two tokens at play here, IRON and TITAN.
USD-pegged stablecoin USDC is deposited in the protocol when a user mints the IRON token while TITAN, which is used for minting, is burned. When the user redeems IRON tokens, the protocol pays back USDC and mints the required amount of TITAN tokens.
“It has a circulating supply of 0 TITAN coins and a max supply of 27.8 Trillion,” states CoinGecko.
The drop in TITAN’s price, after people started selling, caused IRON to lose its peg, which in turn sent the TITAN price crashing, and the whole cycle continued.
Iron Finance protocol noted on Twitter that because the price of TITAN fell to 0, the contract didn’t allow for any redemptions and will take at least 12 hours for the timelock to pass before USDC redemptions are possible again.
“Redeeming IRON for USDC will resume at 5 PM UTC,” tweeted the team on Thursday and asked users to remove liquidity from DND/BNB and DND/IRON pairs.