The latest decentralized finance (DeFi) protocol to suffer a collapse in token value is Iron Finance. The team posted a post mortem explanation of what happened, describing it as a “DeFi bank run.“
In a post mortem report on June 17, the DeFi protocol stated that whales had begun to remove liquidity from the IRON/USDC pool which triggered the series of events.
It added that they then sold TITAN to IRON and then IRON to USDC directly to liquidity pools instead of redeeming IRON, which caused the IRON stablecoin to lose its peg.
“We never thought it would happen, but it just did. We just experienced the world’s first large-scale crypto bank run.”
Destabilizing the Iron Finance stablecoin
The Binance Smart Chain-based partially collateralized stablecoin project has been one of the darlings of DeFi recently due to high yields.
Iron Finance uses a two-token mechanism, an IRON stablecoin intended to be pegged to $1, and a TITAN collateral token. This is designed to absorb market volatility caused by shifts in the supply and demand for IRON.
When demand for IRON exceeds supply and it trades above $1 on the markets, users can mint the stablecoin by supplying $1 worth of USDC and TITAN.
The team explained that a few big holders started selling which created a panic as more started to redeem IRON and sell their TITAN,
“This caused a negative feedback loop, as more TITAN was created (as a result of IRON redemptions) and the price kept going down. A classic definition of an irrational and panicked event also known as a bank run.”
It added that at some points, the price of TITAN became so low it was close to zero. This caused the redeem contract to revert the redeem transactions,
“Iron Finance is a partially collateralized stablecoin, which is similar to the fractional reserve banking of the modern world. When people panic and run over to the bank to withdraw their money in a short period, the bank may and will collapse.”
Iron Finance lost $170,000 from its liquidity pools following erroneous actions by the team in mid-March.
TITAN price collapse
At the time of press, the protocol’s TITAN token had collapsed to zero, or very close to it. CoinGecko was reporting a price of $0.000000033681 after trading for a bit over $60 on June 16.
The IRON stablecoin had lost its peg, surging to $1.48 on June 18 but had returned to $0.996 at the time of press.
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