Titanium Hands Fold First — The Retelling of Iron Finance's Meteoric Rise and Downfall

Titanium Hands Fold First — The Retelling of Iron Finance's Meteoric Rise and Downfall

By DefiDesk | The DeFi Desk | 27 Jun 2021


Some are calling it the scam of the century, while others are joking at Mark Cuban's expense after one of crypto's largest and fastest collapses caught the billionaire and thousands of other investors off-guard. At its peak, Titan multiplied the wealth of its investors and provided cashflow to dozens of other projects—who are now all facing the collective loss of more than $1 billion dollars. 

For the first-time ever, DeFiDesk provides a dramatic retelling of the experience, from the pen of Dr. Cle4ncuts, one of the unfortunate investors who was caught in the heat of the fiery plunge, but survived. There are many more tales like his out there in the twitterverse, but this one has been written solely to document this dramatic historical event, specially for DeFiDesk followers.

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Written by Dr. Cle4ncuts, for sole publication of DefiDesk.

It all started with Yield Farms.

Yield farming began as a way to attract capital on Ethereum. Sushiswap was one of its original inventors, coming up with the now ubiquitous Masterchef contract, which provides a reward token in exchange for staking a certain amount of time and capital. It was originally intended to steal capital from Uniswap, which was the dominant decentralized market exchange in Ethereum at the time. However, in no-time it would become the little black dress of every new DeFi project. 

It was a no-loss, only-gain prospect for depositors, and this succeeded in stealing much of the Total Value Locked in Uniswap and migrating it to Sushiswap. Soon, other protocols began to copy this same model, building projects that benefited from Sushiswap's liquidity mining rewards, while issuing their own token. They often took a hefty performance fee from depositors, while offering value-added services such as auto-compounding and gas savings. 

 

When Polygon launched their layer 2, boasting sub 1-cent transaction fees, and superfast block times, DeFi developers discovered that the yield farming model would work even better on the new network, thanks to high frequency auto-compounding. 

Starting from Polywhale, Polycat, as well as Moonwolf, and Polyzap, the pioneers of high yield farming began with a simple plan: 

  • Convince users to stake their existing tokens, by promising higher than normal APR thanks to auto-compounding. 
  • Give additional tokens as rewards to each liquidity provider of their token, who will actually absorb the loss if the selling pressure is greater than the buying pressure of the token. 

 

The rewards given to the latter were incredibly important, since nobody was really interested in your token. They were only interested in how much profit they could make. Therefore, most of these native token pairings (TOKEN-MATIC, or TOKEN-USDC) were given 50,000%+ APRs in additional rewards. It cost the protocol nothing to print more tokens after all. 

With the prospect of making more than 100% per day, hordes of newly-bridged capital began diverting their attention towards these high-apr yield farms. The problem was inflation. The more tokens that were minted, the less it was worth. Once the market selling pressure caught up with a token, it would create a huge gap between the initial investment of liquidity providers, and the actual return. The 50,000% APR would start becoming worthless when the pool becomes diluted by other liquidity providers, or when the token price dropped more than the reward % could cover. Some liquidity providers never recover their capital. 

 

Some farms get rugged, or exploited by either the project owners, or a third party (such as a hacker or arbitrageur). An opportunist can see a weakness in a projects code or design, and exploit it using the available tools of DeFi, upsetting an economic balance for personal gain. 

Within the month of May 2021 alone, BSC, Binance's clone of Ethereum, suffered a slew of exploits and hacks that resulted in millions of dollars lost or stolen by hackers and opportunists. 

With news of BSC hacks reaching Polygon, some farms began looking for ways to protect their depositors and consequently their own reputation, mostly with timelock or harvest lockups. 

 

A safer way for depositors to gain rewards was to stake their MATIC, ETH, or USDC, but in exchange they have to pay a deposit fee. Polycat used this model to very quickly grow their platform and fight the inflationary pressure of their own minting, using the fees to buyback and burn (remove from circulation) some of the reward tokens that were in the market. At its peak, Polycat's token grew from $5 to $50 in value within two weeks. The developers also setup a "burning vault", or a community pool that generates its own revenue and uses it to issue more buybacks at a more sustainable rate. 

This worked for a while, until the speculative pressure on the Fish token gave way to doubt and led to one of the first widespread dips felt on Polygon, after weeks of resounding success. Despite this, there was some data that showed the migration of ETH to Polygon, after gas fees spiked up to unaffordable levels on Ethereum, leading to investors seeking for a better alternative. For many, that alternative was Polygon, a fast and cheap network solution that was compatible with almost all of Ethereum's code. 

Understanding the migration of capital from Ethereum to Polygon is important, as this paved the way for the massive pool of money that was sitting around, waiting for opportunity to come.

 

Then came Titan. The mother of all yield farms. Titan had a dream of being one of the primary stablecoins of BSC. It took the FRAX model of fractional collateral reserve stablecoins, and brought it also to Polygon. They called their stablecoin Iron. The success of Iron was felt much more on Polygon, where it grew from only 10M in circulation, to nearly 100M within a week. The next week, it grew to 200M. A few days later, it was half a billion. Then 1 billion. 

Speculators went wild. Depositors were overjoyed. During the height of its popularity, Titan was giving out around 1300% annual returns to liquidity providers of Titan and Iron, as well as 500% annual return to USDC-Iron providers, who had little to no risk of loss as long as Iron held its $1 peg. The minting and redeeming mechanism of Iron and Titan worked as long as the protocol kept expanding, and that was the case because everyone wanted a piece of that juicy APR. 

 

Soon, even more farms showed up from BSC. Beefy and Autofarm had made a name for themselves by compounding Pancakeswap (a uniswap clone) rewards on BSC. When they got to Polygon, Iron was already juicing up the yields of just about every vault on the network. Polycat, Eleven finance, Adamant, these are just some of the names of protocols that benefited from the resulting all-you-can-eat buffet of liquidity and capital that migrated to Polygon, as well as the bountiful returns from Iron Finance. 

There were naysayers, those who called Titan a ponzi scheme, or a ticking time bomb, and at the time Titan had already grown from $1.45 to a $30 token. For many, it was the best investment they had ever made in their lives. Most of them were not ready to let it go. Well, tough luck, said the market. 

 

On 16th Jun 2021, at nearly 1am UTC, the Titan began to fall. 

It was a sharp drop to $30 at first, but most brows were unfurrowed. This had happened before, and Titan had always beaten the odds and come out of the dip with a new high, which it has done multiple times. 

But this was no ordinary dip. Unbeknownst to many, a spam attack was scheduled to begin on the Polygon network, the largest ever seen. 

Titan rose back to $50, and Iron repegged in an instant. Investors heaved a sigh of relief. And then it happened. 

 

Suddenly, people started to see their transactions pending for more than a few minutes. From what usually took seconds to complete, this was the first sign that something was wrong. But nobody knew how wrong. At least not until the hammers began to drop. 

One whale sold a chunk of Titan. The price took a step down, and the market felt the impact, like an oil tanker meeting the shore. The spark ignited the petroleum leaking over the decks, all hell broke loose. Some investors woke up to Titan at $29 and falling. Some slept right through it. But in a few hours, the $60-per-token-Titan was now worthless. It's price had plunged to several decimal points close to zero. 

It was not a simple matter of market panic. It was heavily exacerbated by a flaw in the contract that led to the minting of trillions of new Titan tokens, which were immediately sold to market at a blistering pace. Stakers in the liquidity mining contract of Iron Finance or any other vaults were unable to remove their liquidity tokens, which continuously rebalanced itself by buying more and more worthless Titan. Transactions were being pushed with 1000 gas or more, but most of it was already gone by the time it went through. 

 

The $2 billion total value locked in Titan was wiped out, amounting to a measly $200M of Iron and USDC left by the time the dust settled. The team had locked all chats during the struggle, and finally broke the silence with a notice warning everyone from buying Titan or Iron, and promising to publish a post-mortem "once the bank-run is over". 

And with that, the first, and largest Crypto bank-run in history was etched into the record. Left in the dust were thousands of depositors who had lost nearly everything they put in. Polygon vaults also began to deflate. Without the help of Titan's massive revenue, they lost their burning power and were unable to keep inflation in check. Income-sharing vaults like Adamant lost over 90% of their monthly income for shareholders. By anecdotal estimates, Iron Finance might have held close to one sixth of Polygon's TVL at the time of collapse. It certainly was a setback of gigantic proportions. 

Strangely enough, celebrity investor Mark Cuban was also caught in the Iron debacle. At least those who followed him into the flames had the comfort of knowing that he shared at least some of their loss and pain. A small consolation though, and pointed out by many critics of Cuban's call for regulation following the loss: most of the people who were even capable of understanding how to invest in an unknown and anonymous project like Iron Finance, should arguably have known the high risks of doing so.

 

But the final twist: it was common knowledge that risk of hacks or bad actors were fairly pedestrian in such projects, but little did they know that the market would be the final rug-puller.

 

"You shout it out, but
I can't hear a word you say
I'm talking loud, not saying much
I'm criticized, but all your bullets ricochet

Shoot me down, but I get up 
Fire away, fire away

I'm bulletproof, nothing to lose
Fire away, fire away

Ricochet, you take your aim
Fire away, fire away  

You shoot me down, but I won't fall
I am titanium

You shoot me down, but I won't fall
I am titanium"  

David Guetta ft. Sia - Titanium

You can follow the original author and his thoughts on Crypto & DeFi, as @DrCle4n on Twitter.

 


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DefiDesk
DefiDesk

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The DeFi Desk
The DeFi Desk

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