“What we just experienced is the worst thing that could happen to the protocol, a historical bank run in the modern high-tech crypto space”
Whenever we talk, analyze and write about a project in blockchain we must bear in mind that all investment in cryptocurrencies carry significant risks derived from many different factors. Lately in the Crypto world and especially in DeFi there has been a lot of talk about smart contract exploits, flash loans, rug pull and bank runs. This has been the case of the IRON Finance project, as the project’s native token suffered an almost total collapse in price, which they defined as “the world’s first large-scale crypto bank run.”
The run reduced the value of the protocol from $2 billion to almost zero on Wednesday, June 16. its governance token $TITAN fell from its ATH of $64 to its current price which is less than $1.
The IRON token is a token pegged to the US dollar, available on both the Polygon and the Binance Smart Chain. The protocol aims to maintain IRON token price stability or parity by storing sufficient collateral in time-locked smart contracts. This guarantee is used for refunds, which helps maintain price stability. The guarantee consists of two tokens. On the Polygon network, USDC and TITAN token, while on Binance Smart Chain it uses BUSD and STEEL token.
What happened this week in the protocol was that a number of large holders tried to redeem their IRON tokens and sell their iron titanium (TITAN), this caused more TITAN holders suffer “a classic bank run.”
“What we just experienced is the worst thing that could happen to the protocol, a historical bank run in the modern high-tech crypto space. Remember that 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”. The team expressed in a post-mortem post on June 17.
In other words, when the whales started selling the top and exited both $TITAN and $IRON, they subverted the built-in stability created by $IRON redemptions, which would have reduced the circulating supply of $IRON.Some whales started to remove liquidity from IRON / USDC, then sold TITAN to IRON and then IRON to USDC directly to liquidity pools instead of redeeming IRON, causing the price of IRON to go down. Many users panicked “and the whole situation triggered a negative feedback loop. “
This news attracted a lot of the attention of billionaire Mark Cuban, because he was invested in the Iron Protocol. In the wake of the collapse, Cuban is now asking regulators to determine what constitutes a “stable coin. “He has not commented on how much he has lost, however Cuban said “it was enough that he was not happy about it.”
The team plans to conduct an “in-depth protocol analysis” to understand what happened during this unusual event, based on what they have detailed.
Of course, the community spoke out about the bank run, which was filled with comments on social networks, since it seems that many investors in the Iron Finance project lost money, according to a large number of testimonials. Others were not so sympathetic to investors who lost money, as several people repeated the old adage of investing only what you can afford to lose.
As I said in the beginning of my article, you must always spend time to educate yourself and learn more about a project before making an investment to fully understand the risk involved.