Arguably, every investor’s worse nightmare is seeing one of their investment holding’s price drop to zero.
Unfortunately, this nightmare became a reality for the holders of Iron Finance’s Titanium Token (TITAN) cryptocurrency.
In just one day, TITAN fell from its all-time high price of US$64.04 on Wednesday (16 Jun 2021) to almost zero (US$0.00000105) on Thursday (17 Jun 2021).
That is an almost 100% decrease in the value of the TITAN token.
This collapse is even starker when you consider that the total value locked into the Iron Finance Decentralised Finance (DeFi) protocol was about US$2.18 billion on Tuesday (15 Jun 2021).
And at the time of writing, the total value locked has crashed to a mere US$29 million.
Titan is currently trading at US$0.000000033625 (via CoinGecko) at the time of writing.
So you might be wondering…
What caused this collapse and what does it mean for Cryptocurrency investors?
Here is all you need to know!
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any investment product.
TL;DR: Iron Finance’s TITAN Token Drops Almost 100% in One Day
- Background of the Iron Finance protocol’s token economics (tokenomics) that explains the conditions that led to this crash.
- The perfect storm of the Iron Finance protocol’s flawed tokenomics, panic selling by whales and other individual investors and a host of other factors led to TITAN’s token price crashing.
- What you can learn from this crash.
- Do not follow billionaires (or anyone for that matter blindly) and do your own due diligence before investing any of your money. Also, it is important to diversify your investment portfolio.
- DeFi projects and Cryptocurrencies are still very risky investments as the whole space is still in its infancy and kinks are being ironed out.
- DeFi projects and Cryptocurrencies are still largely unregulated. Also, due to its decentralised nature, there will be little to no consumer protection when stuff like this happens.
What Is Iron Finance and the TITAN Token?
Before we begin, here is some background of the Iron Finance DeFi protocol that will help you understand what happened.
Essentially, this protocol is a multi-chain partial-collateralised algorithmic stablecoin.
FYI: Stablecoins are a category of cryptocurrencies that try and peg their market value to an external asset like fiat currencies, precious metals or other cryptocurrencies in a bid to stabilise the price.
The protocol’s main ‘product’ so to speak is its IRON token: a stablecoin that is soft-pegged to the U.S. dollar which is available on both the Polygon and BinanceSmartChain blockchain networks.
Iron Finance’s main goal is to ensure that the IRON token’s price is stable and maintains its peg to the U.S. dollar. If the system works as designed, you will be able to redeem 1 IRON token for about US$1 worth of tokens.
To achieve this peg, Iron Fiance has stored collateral into time-locked smart contracts on the blockchain networks where the collateral is automatically mined or redeemed and managed algorithmically.
For Polygon’s network, IRON is backed by a combination of stablecoin like USD Coin (USDC) and a volatile asset like the TITAN token.
For the BinanceSmartChain network, IRON is backed by a stablecoin like Binance USD (BUSD) and the volatile STEEL token.
Iron Finance Tokenomics
Here is how the token economics (tokenomics) of the IRON.TITAN tokens work.
Basically, the tokens are managed by a minting and redeeming system which works in this manner:
- USDC/BUSD tokens are deposited into the Iron Fiance protocol when a user mints an IRON token. At the same time, the TITAN/STEEL tokens which are used for minting are burned (destroyed).
- On the flip side, when a user redeems IRON tokens, the protocol pays the user back in either USDC/BUSD and mints the required amount of TITAN/STEEL tokens to give to the user.
Also, the ratio of mining and redeeming of USDC/BUSD or TITAN/STEEL tokens is based on a Target Collateral Ratio and by the Effective Collateral Ratio set by Iron Finance.
This collateralisation ratio for IRON/USDC/TITAN is a floating number that is managed algorithmically to maintain the float.
All in all, this means that there is a direct correlation between the value of TITAN and the circulating supply of IRON.
When new IRON tokens are minted, there will be a corresponding increase in demand for TITAN tokens which will drive up the price.
On the other hand, when the price of TITAN falls drastically like what happened on Wednesday, the peg becomes less stable.
How Did The TITAN Token Collapse Happen? ‘Cryptocurrency’s First Large-Scale Bank Run’
Here is a breakdown of what happened according to a post-mortem blog post from Iron Finance.
At about 6pm Singapore time (SGT) on Wednesday (16 Jun 2021), there appeared to be some whales who were messing about with liquidity on Iron Finance’s protocol causing the price of IRON to go off peg.
FYI: In the cryptocurrency world, a whale refers to individuals, groups or companies that possess large amounts of a specific crypto token.
This caused the TITAN token’s price to crash from US$65 to US$30 in three hours.
But TITAN’S price managed to bounce back in one hour to US$52 and IRON’s peg was restored.
But later that day at around 11pm SGT, more whales started selling again. This triggered panic as many users started redeeming their IRON tokens to sell their TITAN tokens.
This created a negative feedback loop because when more users redeem their IRON, more TITAN is created which floods the supply of TITAN in the market and drives the price down.
The panic selling from holders of the TITAN tokens did not help either.
As such the market was flooded with a huge supply of TITAN tokens which may have caused a bank run.
FYI: A bank run happens when the majority of the customers of banks or other financial institutions (in this case the Iron Finance protocol) try and withdraw their money all at the same time.
As a result, the price of the TITAN Token started to crash and the IRON token started trading way off peg as well.
This selling pressure also activated the IRON token’s mechanism that mints more TITAN tokens and removes liquidity in an effort to restore the IRON token’s peg to US$1.
This created a big arbitrage opportunity due to the price difference between TITAN and IRON as explained by Iron Finance:
If the price of the IRON token is less than US$1, then anyone can purchase it on the open market and redeem it for approximately US$1 worth of value when there is a profitable arbitrage opportunity.
If the price of the IRON token is more than US$1, then anyone can mint it with the protocol for approximately one USD worth of value and sell it on the open market when there is a profitable arbitrage opportunity.
Many people capitalised on the arbitrage opportunity which resulted in more TITAN tokens being minted which flooded the market and added more selling pressure.
This in turn destabilised the IRON token’s price further.
At the time of writing, there are currently about 34,400 billion TITAN tokens circulating.
In just one day, TITAN fell from its all-time high price of US$64.04 on Wednesday (16 Jun 2021) to almost zero (US$0.00000105) on Thursday (17 Jun 2021).
Also, the IRON token is currently trading at around US$0.75 which is way off the peg.
Mark Cuban Iron Finance Investment
One of the most high profile victims of this ‘bank run’ or ‘rug pull’ as many in the world of Cryptocurrency would call it is American billionaire Mark Cuban.
The entrepreneur, television personality (Shark Tank), and investor who has a net worth of about US$4.4 billion (S$5.83 billion) is involved with
According to his blog post which was posted on 13 Jun 2021, Cuban is actually a liquidity provider for the Iron Finance protocol as he stated he:
provides 2 different tokens (DAI/TITAN) that enable QuickSwap to offer swaps between these two tokens. As you can see here, this pair is one of many, and you can also see that based on the .25 pct of volume in this swap that QuickSwap pays, my return on my initial $75k investment (based on fees only) as of this writing, is an annualized return of about 206% (Based on the fees earned in the last 24 hours.
In an interview with CoinDesk, Cuban refused to reveal how much he had lost, stating that ‘it was enough that I wasn’t happy about it.’
Closing Thoughts
Well, what can we learn from this crash?
A few points.
First, do not follow billionaires (or anyone for that matter) blindly and do your own due diligence before investing in any DeFi project or Cryptocurrency.
P.S. This opinion piece is a good place to start.
Even though Mark Cuban is known for his business acumen, he still can make bad bets as evidenced by what happened with the Iron Finance protocol.
For context, Cuban became a billionaire when he sold Broadcast.com, a video portal company he started with Todd Wagner to Yahoo for US$5.7 billion (S$7.56 billion) in 1999.
So in sum, do not trust anyone.
Second, this crash was caused largely by a perfect storm of the Iron Finance protocol’s flawed tokenomics, panic selling by whales and other individual investors and a host of other factors.
Although not all Cryptocurrencies or DeFi projects are alike, it is important to remember that the whole DeFi and Cryptocurrency space is still in its infancy.
DeFi projects and Cryptocurrencies are still very risky investments as most of the space is still in its infancy.
We are still at an experimental stage where the kinks are being ironed out which means stuff like this will still happen.
Not to mention that DeFi projects and Cryptocurrencies are largely unregulated. Also, due to its decentralised nature, there will be little to no consumer protection when stuff like this happens.
So do invest safely, do your own due diligence and invest only money you can afford to lose.
It is also important that you diversify your investment portfolio so that the damage from a crash like this will not ruin you financially.
