Attack On Titan - The Daily Gwei #271

Where there's an algorithmic stablecoin, there's a rug.

Iron Finance - it’s an “algorithmic stablecoin” project native to Polygon and BSC. Today, that project death spiraled leaving many people holding the bag of yet another algorithmic stablecoin “experiment”. The tl;dr on what happened was that there was a “bank run” on the project which caused the price of the project’s native token to drop to $0. The funny thing about Iron Finance is that it’s a project that Mark Cuban promoted just days ago in this blog post.

I’m by no means an expert on the Iron Finance project but here is a breakdown of what happened over the last 24 hours (as I understand it). The way the IRON “stablecoin” works is that it is partially backed by both USDC and TITAN and of course, it’s pegged to $1. Users are able to mint new IRON by locking up TITAN and USDC tokens (25% for the former, 75% for the latter). The way the mechanism is meant to work is that when new IRON is minted, the demand for TITAN increases because it’s used to mint new IRON, which in turn drives up its price. You can probably see the obvious downside to this - that is, when demand for TITAN falls (or it gets sold into the market), IRON’s peg can become unstable - this is exactly what happened over the last 24 hours.

So, let’s move onto the actual details of what happened. The price of TITAN achieved an all time high of around $65 and then large holders started dumping TITAN tokens en masse which triggered a market-wide panic selling event. Of course, IRON lost its peg while this was happening and you could now redeem IRON (worth $0.90) for 75 cents worth of USDC and 25 cents worth of TITAN which presented a lucrative arbitrage opportunity. This then led to TITAN tokens flooding the market which pushed the price down dramatically which meant that IRON’s price kept dropping. This cycle would continue until IRON’s peg was restored for all of 15 minutes (and TITAN started to recover) but then IRON lost it’s peg again and well, the rest is history. The end result is that TITAN’s price went to $0 because it will keep dropping as long as IRON is not pegged to $1 but IRON will not be pegged to $1 if TITAN keeps dropping.

So there you have it - another “DeFi” project that blew up due to failed mechanism design (and it certainly won’t be the last). I’m all for doing radical experiments in this industry but I don’t think Iron Finance was that - I’m pretty comfortable with calling it a ponzi. Though herein lies the problem - calling out projects as ponzis or scams has a negative return in crypto because it’s very hard to convince people that their favorite project is a scam if they’ve made money on it. If you do try to, what ends up happening is that you have an army of token holders descending upon you with toxicity and vitriol - so most people just stay quiet until the scam/ponzi inevitably blows up.

Given that Iron Finance was native to both Polygon and BSC, I suspect that a lot of newer crypto users got burnt in this rug pull. Hopefully this whole fiasco can serve as a good lesson for these people and help them avoid these sorts of projects in the future (in my experience, people only really learn once they lose money). Though given the permissionless nature of these networks, I don’t expect these scams, ponzis and rug pulls to ever go away.

Have a great day everyone,
Anthony Sassano

Join the Daily Gwei Ecosystem

All information presented above is for educational purposes only and should not be taken as investment advice.