The IRON Titan fiasco: a cryptocurrency gone wrong.
Disclaimer: I did not own any IRON, TITAN, or use any services on the IRON finance platform.
Wednesday, June 16, 2021 was an unremarkable weekday for most people. On this day, however, a decentralized finance (DeFi) protocol named IRON finance and one of its coins, TITAN, collapsed, leaving thousands of people with huge losses and many unanswered questions. I am by no means any kind of expert on cryptocurrency, nor am I qualified to do a post-mortem on what exactly happened from a technical perspective. But I thought it would be interesting to document my observations and opinions. What happened to TITAN? Was is it a rug pull, a hack or exploit, a ponzi scheme, or something else?
Background
First, a few very basic definitions. A DeFi exchange, or DEX, lets you convert one DeFi asset for another (usually one cryptocurrency coin for another), without needing to convert to fiat currency (i.e. USD) first. Assume that 1 Bitcoin is worth $40,000 and 1 Ethereum is worth $2,500. If you wanted to exchange your Bitcoin for Ethereum, you could go through a traditional, multi-step process of exchanging Bitcoin for fiat (i.e., sell it for $40,000), then exchange the fiat to Ethereum (i.e., buy 16 Eth). On the other hand, a DeFi exchange allows you to directly swap 1 Bitcoin for 16 Ethereum without needing to convert to USD first. This is known as a “trading pair”. Because no currency exchanges operate for free, DeFi included, the user must pay a fee for the swap.
In order for a DeFi exchange to function and be able to offer various trading pairs, it must have access to sufficient quantity of both coins to begin with, which it puts in a pool known as a liquidity pool. It invites existing owners of both coins to contribute their coins to the pool to provide liquidity. This act is known as being a liquidity provider, or LP. In return for contributing their coins to a pool, the LP gets paid a portion of the transaction fees as a reward. Popular DeFi exchanges include SushiSwap, QuickSwap, PancakeSwap, and UniSwap, to name a few.
A stablecoin is a cryptocurrency coin whose value is “pegged” to something (usually USD), such that its price does not fluctuate. Stablecoins were created to facilitate crypto exchanges due to the volatile nature of most cryptocurrencies. Examples of stablecoins include Tether (USDT) and USD Coin (USDC). The price of these stablecoins remains at $1. One way to create a stablecoin would be to issue a coin and guarantee that every coin issued is backed up by $1 of USD held in a bank. Whether these stablecoins are in fact fully backed by USD reserves is a contentious topic. Another stablecoin is DAI, which also maintains a price of $1, but is actually backed by another cryptocurrency, Ethereum, rather than USD.
What is IRON finance?
IRON finance is a platform that sought to create a new stablecoin on the Polygon network (an Ethereum side-chain) called IRON. According to IRON finance’s algorithms, IRON coins are pegged to $1 like other stablecoins, and are created from combining USDC and another IRON finance coin called TITAN. The ratio of USDC and TITAN would be algorithmically determined. Therefore, the price of IRON would be partially pegged to an existing stablecoin, and partially pegged to a new cryptocurrency. The TITAN coins would be distributed as “farmable” rewards for using IRON finance’s platform. When TITAN is combined with USDC, a new IRON could be minted, and the TITAN would be destroyed. On the other hand, when a user redeems an IRON coin, they receive USDC and newly minted TITAN in return. All of this is explained in the whitepaper for these new coins. Some of the relevant pages are below:
All of the above might be somewhat confusing, and there are many aspects of this story that I don’t fully understand myself. Nonetheless, fireworks were about to commence.
The catalyst?
On June 13, 2021, Mark Cuban posted a blog titled “The Brilliance of Yield Farming, Liquidity Providing and Valuing Crypto Projects”. His blog post goes into some more detail about DeFi businesses and DeFi exchanges, as I described above. He appears to be incredibly bullish about the future of cryptocurrency. He reveals that he is an LP for a DAI/TITAN pair on QuickSwap. He notes that he has about $75,000 invested in this pair, and that he is in fact the only provider of DAI/TITAN liquidity on QuickSwap. This means that whenever someone exchanges DAI for TITAN or vice-versa, he captures all of the fees involved in the exchange. He estimates that his annualized rate of return on his investment is 206%!! Throughout the blog, he gushes about how brilliant all of these DeFi protocols are. Note that he wasn’t really advocating for TITAN in particular; he was simply providing an example of how to profit from DeFi by providing liquidity to a crypto exchange.
Regardless, this is Mark Cuban we’re talking about. His blog was widely circulated and linked to by hundreds of websites. Undoubtedly, IRON finance and TITAN received a lot of exposure from his blog from people who had never heard of them before (I hadn’t). And people discovered that on IRON finance’s website, it was possible to provide liquidity for several pairs, including TITAN/ETH, TITAN/Matic, IRON/USDC, etc., (see one of the images above) on either QuickSwap or SushiSwap, and earn huge rewards. In fact, the rewards were absurd - as much as 5% per day!
The reason for providing rewards is simple. In order to attract and incentivize users to adopt IRON and TITAN, these new coins are made available on various DeFi exchanges, and IRON finance gave significant rewards in TITAN coins to LPs who provided their coins alongside an existing coin as liquidity, so that even more people could buy IRON and TITAN.
This probably led to a significant number of people interested in buying TITAN so that they could earn TITAN rewards as well. In fact, I texted my friend about this on June 15th, although clearly we both thought the APY was too good to be true. I don’t know how many people bought into TITAN over these few days. But 3 days after Cuban’s blog post, in the early morning of Wednesday, June 16, 2021, the price of TITAN peaked at a high of $65.
What happened next remains unclear, but in all likelihood, people who held significant reserves of TITAN began dumping their TITAN in order to take profits when TITAN reached such a high price. But unlike past fluctuations in TITAN price, this time, TITAN never recovered. Starting at 9am and lasting until 8pm, the world witnessed one of the most spectacular asset crashes of all time, where the price of TITAN fell from its high of $65 down to fractions of a cent, and finally to 0, over the course of a few hours. I should note that in comparison, Enron’s stock price took approximately 14 months to collapse to 0 from a high of around $90.
As the collapse unfolded, liquidity pools stopped working. This also led to some interesting results on the IRON finance website, such as a pool offering infinite returns:
Aftermath
IRON finance urged people to withdraw all of their liquidity from pools in a twitter post on June 16 at 7:25pm, but it was already too late. The polygon network also experienced extreme congestion throughout the day. Many people saw their money simply vanish.
People who lost money weren’t just those had TITAN. Of course, people who bought TITAN coins at any price and held onto them suffered 100% loss when the price of TITAN went to 0.
Next, people who bought into IRON at $1 believing that it was a stablecoin lost money when IRON broke its peg, falling to as low as 59 cents. (pic)
So much for a stablecoin
Finally, and worst of all, people with any other coins paired with TITAN in a liquidity pool (i.e., ETH and TITAN) lost the other half of their assets. They didn’t just lose TITAN’s half of the pool; they lost everything. This is because as the price of one asset drops, the asset in the pair that still has value gets traded out of the pool. For example, in an ETH/TITAN pool, when the price of TITAN decreases, the pool ends up with less ETH and more TITAN from trading, but the overall value of the pool assets remains about the same. This is fine, except that when the price of TITAN goes to 0, the pool ends up with 0 ETH, and billions of TITAN, but now the TITAN is worthless.
But that’s not all! Even if someone was able to exit the pool early enough to preserve some of their non-TITAN assets, they still suffered a loss, albeit not a total loss. This is due to a phenomenon called impermanent loss, which occurs when the price of one asset in a liquidity pool is volatile compared to the other asset. Impermanent loss is so named because the loss is recovered if the LP remains in the pool and prices return to baseline. However, impermanent loss is made permanent when the LP withdraws their liquidity.
For many crypto beginners, these last 2 points were difficult to swallow. IRON finance’s twitter feed was filled with bewildered users wondering where the other half of their pool assets went. I think many people did not fully realize the risks of providing liquidity to a liquidity pool, especially for a new coin. Mark Cuban certainly didn’t mention it in his blog. In fact, I’m not entirely sure that he was aware of this risk. He only mentioned that price volatility can create mark to market losses in crypto. This only covers the first two loss scenarios above. When you join a liquidity pool with two assets, such as ETH and TITAN, the collapse of one asset will lead to loss of the other, even though ETH’s market value was unchanged!
All in all, IRON finance had in excess of $2 billion USD of liquidity in their pools prior to the collapse. As of the morning of June 17, only about $240 million remains. This number is likely to shrink further as people who hold IRON coins continue to redeem them, and move their remaining assets off the platform entirely. Update: as of the afternoon on June 17, only about $40 million remains.
What happened?
Many people speculate that it was in fact a “rug-pull”, where developers of a cryptocurrency project, who also tend to hold the largest reserves of the cryptocurrency coin, decide to abandon the project and dump all of their coins on the open market, taking as much profits as they can along the way. As in, “pulling the rug” from underneath everyone. Unfortunately, this sort of thing is all too common in the cryptocurrency space. For what its worth, the developers of IRON finance have adamantly denied this (although would they really admit to it even if it were true?).
Non-malicious explanations exist as well. Since the price of IRON is partially pegged to TITAN, a drop in TITAN’s price causes the price of IRON to drop as well. This probably spooked people who held IRON as a stablecoin, causing them to redeem IRON back for USDC (a much more “stable” stablecoin) and TITAN. Unfortunately, any IRON redemption floods the market with more newly-minted TITAN, causing its price to fall further. As one twitter user pointed out, the total supply of TITAN coins in the first year was not supposed to exceed 333 million, but at the end of the day, the market was flooded with 27 trillion TITAN tokens
Obviously, the price of TITAN cannot support 83,000x more TITAN coins flooding the market. From reading the whitepaper, it is unclear whether this is a bug in the IRON redemption algorithm, or whether the algorithm worked perfectly but the developers simply didn’t account for this behavior. It is clear that the developers intended to cap TITAN at 333 million, but it is possible that they only capped the amount of TITAN provided via staking and liquidity rewards, and did not cap the amount of TITAN that could be generated from IRON redemptions. If so, it would represent a massive oversight.
Late in the afternoon on 6/16/21, Mark Cuban tweeted:
It’s unclear how much Mark Cuban lost in this ordeal. But it serves as a good lesson: cryptocurrency is RISKY. Mark Cuban can afford to lose $75k. Most people cannot. Do not gamble with what you cannot afford to lose!
The developers of IRON finance have promised to release a post-mortem analysis on what exactly happened. The world is eagerly waiting.
Update: The post-mortem article has been posted. The developers appear to endorse the theory that IRON redemptions caused the supply of TITAN to explode out of control, describing IRON redemptions as a “crypto bank run”. It remains unclear how the supply of TITAN exceeded the cap on TITAN circulation described in their original whitepaper. Many people were displeased with IRON finance’s analysis, noting that their message was tone-deaf, they appeared almost proud of the fact that they experienced a “historic” digital bank run, they appeared to be blaming the users for “irrational” behaviors, that they did not address the issue of the cap on TITAN supply, and that they also used the post-mortem to plug their upcoming projects. Unfortunately, at this time there does not seem to be any recourse for users who lost money.
