Iron Finance bank run stings investors-the lesson of all stablecoins?

The crypto world has recently been flooded with negative events.One of the most recent is Iron Finance bank run on June 16Iron Finance is a multi-chain, partially mortgaged stablecoin protocol. Its main goal is to provide a stablecoin pegged to the U.S. dollar for use in DeFi applications. This is the first large-scale bank run on the cryptocurrency market.

Iron Finance’s stable currency IRON is a partially mortgaged token softly pegged to the US dollar and can be used on the Polygon network and Binance Smart Chain (BSC). The collateral of the tokens is backed by two different tokens on each network. On the Polygon network, it is a dollar coin (USDC) And TITAN tokens, while on BSC, it is secured by Binance Dollar (BUSD) and STEEL tokens. Polygon network and Iron Finance are agreements Supported by billionaire investor Mark Cuban.

TITAN is the internal mortgage token of the stable coin IRON, and it is at the forefront of the bank run together with IRON. TITAN is allocated to liquidity providers (LP) for pledge in various liquidity pools. LP earns profits through trading and realizes liquidity so that other investors can buy TITAN tokens.

As Cuban is in his Blog He is one of the LPs of the agreement in terms of yield agriculture, liquidity provision and encryption project valuation. He staked his TITAN tokens on the QuickSwap exchange and provided TITAN/DAI trading pairs on the platform. This means that when investors use Dai to buy TITAN, Cuban will receive 100% of the trading profits.

Soft pegs and partial mortgages lead to bank runs

Due to the price of TITAN tokens, the bank run caused nearly $2 billion in losses to investors including Cuban.It from trading It reached around US$10 on June 9 and hit a record high of US$64.19 on June 16. This high point prompted some whales to seize the opportunity to sell their tokens, which eventually led to panic selling, triggering the domino effect as part of the mortgage coin and further becoming the focus of attention.

Then the market was flooded with TITAN tokens, causing the token price to drop to nearly $0, resulting in a total loss of $2 billion. Since the IRON stablecoin uses TITAN as collateral on the Polygon network, its soft peg to the US dollar is also affected. The value of the token dropped by nearly 30% almost immediately, and the transaction price was $0.7. Scott Melker, a cryptocurrency trader and analyst, told Cointelegraph:

“Iron Finance’s popularity among yield farmers continues to rise. LunarCRUSH’s token popularity ranks 9th, and other social listening platforms’ tokens rank in the top 10. The behavior of some major sellers indicates that Iron Finance is only partially collateralized. Large-scale The bank run caused the system to collapse, effectively killing the entire network.”

Algorithmic stablecoins like IRON are Often difficult to design and maintain, Both economically and technically. Michael Gasiorek, director of growth at TrustToken, creator of the USD-pegged stablecoin TrueUSD, told Cointelegraph why, despite some concerns, it was not a carpet pull:

“Iron Finance itself is not a’carpet pull’-the loss is not caused by obvious malice or theft, but just invalid token economics and smart contract design. These technical skills and time-consuming people can predict. Research project design.”

Although steel finance has Announce Since the agreement now resumes USDC’s redemption of IRON, the price of IRON has not yet rebounded to its original value of $1, so any redemption will cause losses to investors and liquidity providers.The company released an autopsy report report Analyze bank runs. The report mentioned that IRON stablecoin v2 will be launched later.

Cuba calls for regulation, but does this stifle innovation?

Since Cuban is the most eye-catching investor affected by the bank run and the only liquidity provider for the TITAN/DAI trading pair, his opinions are highly sought after in the financial market.

After the public fiasco, Cuban has call The regulation is to “define what is a stablecoin and acceptable collateral.” However, Gasiorek has the opposite view on this, while emphasizing the importance of thorough and detailed research, he believes:

“Regulation is an important part of the mature investment field, but [it] Innovations that can stifle young and growing markets, such as encryption. If you want to prevent losses, learn more about your investment object, be particularly skeptical when earning 1,000% returns, and accept the huge risks associated with such premiums. If the risk catches up with you, maybe don’t yell at the regulator. “

Gregory Klumov, CEO and founder of Stasis, the company behind the largest euro stablecoin, added: “Any mandatory regulation may reduce the rate of innovation and attractiveness to global customers. Self-discipline and incremental development are more affected by the decentralization of the field. The attraction of chemical nature.”

Since stablecoins are often used by crypto investors and liquidity providers, while switching between positions in certain cryptocurrencies and avoiding the liquidity of other cryptocurrencies, they are widely used in the crypto field. In fact, the market value of all major stablecoins has increased fourfold this year, from nearly 25 billion U.S. dollars to more than 100 billion U.S. dollars today.

Paolo Ardonio, CTO of Tether, the company behind the USDT stablecoin, added in a conversation with Cointelegraph: “Not all stablecoins are created equal. In some projects, there is a risk of everything being zeroed.”

Will self-discipline be the way forward?

This is not the first time a stablecoin protocol has appeared under the microscope.Last year, Tether became the center of attention, when File a lawsuit against the company and Bitfinex Prosecuted by the New York Attorney General for suspected illegal activities and reserve-based market manipulation.After a long litigation process that lasted until February of this year, the New York Attorney General’s Office reached a settlement with Tether, and the latter paid Fined $18.5 million and agreed to submit its reserve report.

Nonetheless, at the time of writing, USDT’s market value has almost tripled this year, from 21 billion U.S. dollars to around 63 billion U.S. dollars. Melker further explained how Tether can be used as an example of a crypto company, stating that as a consequence of the settlement, crypto companies have to resist fear, uncertainty and doubt (FUD) generated in the market: “Malicious regulators are looking for their Any dirt found is in the crypto space, and due to its popularity and controversial history, Tether is a good place for them to start.”

related: Looking to the future: Is the drop in Bitcoin’s hash rate an opportunity in disguise?

Such stablecoin events usually indicate that economies like the United States have greater demand for central bank digital currencies (CBDC).However, a representative of the Bank of England, the Central Bank of the United Kingdom, has already Oppose the hype of stablecoins Bringing a “beautiful new world”, saying that regulators should not treat them differently just because these tokens are packaged in “shiny technology.”

However, Gasiorek further believes that stablecoins are also applicable to the risk of CBDC: “No technology is immune to abuse, and even CBDC is unlikely to solve fraudulent or suspicious group financing problems alone. We believe that CBDC can be compared with privately developed numbers. Assets work together.”

As the competition for the first global CBDC intensifies and the position of stablecoins in the crypto market continues to increase, due to the huge impact of CBDC on the stablecoin market, regulators may play a key role in the future. Melk further talked about the nature of this interaction between the two:

“CBDC is inevitable because it is the dream of central bankers to control the money supply completely-not because of the failure of stablecoins. The world is going digital, and money is not immune. This will push more people to adopt Bitcoin and other encryption Currency because people realize that they are giving up privacy and freedom with digital dollars.”