The decentralized finance protocol known as Iron Finance recently experienced a catastrophic failure, resulting in billions of dollars of value vanishing during a first its kind crypto-bank run.
The IRON token is the stablecoin for the protocol.
The TITAN token is the utility and governance token for the protocol.
Iron Finance is a decentralized finance protocol that utilizes a two-token mechanism to create stablecoins called IRON, backed by collateral in the form of utility and governance tokens called TITAN.
If you are confused by the above explanation, that's because this stuff is pretty complex. I'm pretty much just regurgitating the synopsis of the Iron Finance protocol from a quick Google search.
If you read Flarnchain #20, I discussed a stablecoin called DAI, backed by MakerDAO, the Decentralized Autonomous Organization responsible for minting DAI and secured by the utility and governance token MAKER. Iron Finance is structured similarly, but the protocol had a fatal flaw that resulted in the IRON stablecoin breaking from its peg to the US Dollar.
Basically, IRON was designed to always be worth $1.00, or at least be really close to $1.00. On June 16, 2021, the IRON token started to deviate from $1.00, causing mass panic and a "run on the bank," so to speak. Think of these decentralized finance protocols like Tiny Little Baby Governments (TLBGs), with their own monetary policy and voting mechanisms. The people who participate in the protocol are like a combination of both citizens and politicians in the government. When the protocol stops doing what it was designed to do, fear and uncertainty can cause capitulation, where a mass sell-off of the underlying asset causes a free fall in the value of the utility token. In this case, the TITAN token crashed from around $60 to $0 in 1 day.
Here's the chart for the IRON token. You can see where it deviated from it's peg of $1 pretty clearly:
The dotted orange line is $1.
The light blue line is the IRON token "stablecoin"
designed to stay equal to $1.
The IRON token stopped doing that on June 16, which was "Not Good". By itself, this bank run and the subsequent death spiral of the price of the IRON and TITAN tokens is incredibly fascinating with all sorts of interesting mechanisms to analyze. Those mechanisms, however, are FAR outside the scope of this newsletter and far too complex for me to explain in any way that is meaningful because I am too stupid to actually understand these things on a fundamental level. If you are interested in the nuts and bolts of how Iron Finance and its tokens imploded, I strongly encourage you to check out this exceptionally well-crafted post mortem video by YouTuber Finematics here: BANK RUN in DEFI - Lessons Learned From The Iron Finance Collapse So, what does Mark Cuban have to do with the fall of Iron Finance? Well, Mark Cuban made a post on his blog on June 13, 2021 praising Decentralized Finance (DeFi) for the robust investment and liquidity-providing opportunities that this new form of high finance can bring to the masses. Professional basketball player, Mark Cuban The blog post, which can be found here, conveyed the giddiness of a kid in a candy store, which gives me a lot of confidence that Mr. Cuban performed his due diligence on TITAN and the Iron Finance Protocol... NOT, lol:
So in exchange for providing the Liquidity both TITAN and Quickswap need for their businesses, I get .25 of the transaction volume for swaps between these two tokens. As long as I keep making a good return, I will keep my money invested (Volatility can create mark to market losses). If not, I can immediately withdraw it (some platforms have a hold period or penalties) . Have enough LPs and the exchange is far more capital efficient than a similar traditional exchange business and i get to make some money!
- Mark Cuban, June 13, 2021, Blog Post on Blog Maverik
As discussed above, a prophecy, if read and believed by enough people, can be self-fulfilling in the world of open financial markets. Mark Cuban, being a billionaire and public figure (most noteably on what my wife calls "Fish Tank, wait no "Shark Bowl?"), demands the attention of hundreds of thousands, if not millions of people who are interested in what he has to say. This type of power can move financial markets and can add legitimacy to a project with a few taps on a smartphone via a precisely worded tweet.
Unfortunately, in the case of Iron Finance, the protocol itself had a fatal flaw that resulted in a death spiral and catastrophic failure of the protocol. No amount of tweeting was going to save it from demise.
Here is the June 2021 price chart for TITAN, the native governance and utility token for the Iron Finance protocol, with some annotations.
The price of TITAN peaked, and subsequently plummeted,
3 days after Mr. Cuban's blog post.
From $64 at its peak to $0.000000015109 at the bottom.
For you math wizards out there,
that would be a 99.9999% decrease in value.
In the aftermath of this destruction, Mark Cuban was one of the first to admit that investing brazenly in the crypto market, especially in smart contract-based decentralized finance protocols, carries significant risk. He was also quick to call for regulation of these markets.... Where were those calls before you got burned Mark? Rules for thee / not for me, eh?
I got permission to use this image.
Image credit: @za9lan on Torum I've come to realize this meme might be someone's original content... Anyone who knows who created it, please let me know so I can credit the actual creator! Anyways, the above is a cautionary tale as old as time. Fly too close to the sun, and your wax wings will melt... or you will lose a lot of money... whatever, you get the point. These decentralized protocols are unregulated, so if you don't understand what you are interacting with, either accept that risk or perhaps steer your boat into less dangerous waters. It may seem like I'm being a bit harsh on Mark Cuban. Here's my response to that... Mark Cuban is a very successful business person and billionaire who has reached a level of celebrity status for being the owner of the Mavericks NBA franchise, as well as for his TV appearances on Shark Tank, among other celebrity appearances. Mark Cuban took a risk with some of his own money and lost it. The world needs risk-takers, so I don't fault him for taking a risk. However, it's important that we can criticize and evaluate those risks, understanding that there is a big difference between Mark Cuban investing $65k in a crypto-protocol (equivalent to about $1 invested by a normal person) and some normal person off the street losing their life's savings. At a bare minimum, we should all be careful about taking the advice from celebrities and billionaires because they may not always know what they are talking about. Mr. Cuban, if you end up reading this, I do think that you have been, and can be, a force for good in the crypto space and that you are a welcome ambassador to crypto. I wish you all the best in your future endeavors, and I look forward to reading and writing about more of your adventures in this crazy new world. Until next time. -Flarn