[Market Info] Alpha Homora’s Debt to Iron Bank and Crypto Uncollateralized Landing
On 13th Feb, Alpha Homora was exploited by a hacker and US$30m worth of ETH was extracted from its vault.
This happened to Alpha Homora’s V2, a new version that was a few weeks old and worked with another relatively new project Iron Bank by Cream Finance. We have covered both Alpha Homora and Cream Finance in the past. We did not go into details on Iron Bank, as it’s generally not related to users. We highlighted the essence of Iron Bank in a tweet:
In essence, Iron Bank is a B2B lending platform in the crypto lending industry. It allows Cream Finance to lend its surplus balance to platforms like Yearn or Alpha Homora. Yearn and Alpha Homora in turn lend to their users.
The industry regarded Iron Bank as uncollateralized lending, as such lending is based on the credit of Yearn or Alpha Homora. We highlighted that whilst this is not wrong, it’s an understatement. Iron Bank is not exactly uncollateralized; it’s collateralized by borrowers of Yearn or Alpha Homora, who deposit assets to these platforms as collaterals. Iron Bank relies on these collaterals to lend to Yearn and Alpha Homora. Each transaction from Iron Bank to Yearn or Alpha Homora has a collateral backing from a specific user.
Under the normal circumstances, if a user’s vault from Alpha Homora has borrowings from Iron Bank and unfortunately this user’s vault is liquidated, Alpha Homora will seize the user’s collaterals, and pay back Iron Bank after liquidation charges.
If we were to draw an analogy in the traditional finance world, Iron Bank is like a bank that finances automobile loan companies like Alpha Honora. Users put down the ownership certificate of the car (as collaterals) with the automobile financing company, and drive away from the car; automobile company pledges the ownership certificate to the bank and borrows some $USD to pay for the car; users will repay the automobile financing company in some later time, with interests. When the automobile loan is fully repaid, the user takes back the ownership certificate; or he defaults, then the bank sells the car (as it holds the ownership certificate).
Iron Bank and Alpha Homora work in a similar way. So it’s not lending on credit, but rather, a transfer of collateral that enables cross-platform lending flexibility. Cream Finance, the operator of Iron Bank, does not have to know the users of Alpha Homora.
Then this is what went wrong. There is a hacker amongst Alpha Homora users and on 13th Feb, he drained the funds of the ETH vault of Alpha Homora and left in the vault collaterals way undervalue. The full story is recounted here: So what actually happened? A deep analysis into the Cream // Alpha incident that took place recently. We do not further elaborate here. Using the above analogy, someone coned the automobile financing company, took an expensive car away (e.g. Rolls Royce) but left only an ownership certificate of a Toyota.
Now, Alpha Homora had acknowledged that it’s an exploit on them and not Cream. It was indeed confusing for a moment.
The questions following the issue then will be:
- Who will bear the loss?
- Whose fault was it?
From a smart contract perspective (and let’s assume that there’s nothing beyond smart contract between Cream Finance and Alpha Homora), there’s nothing to be done. The hack will result into Alpha Homora’s inability to pay Iron Bank’s debt, as some of Alpha Homora’s assets were stolen. So the loss is eventually on Iron Bank, i.e. Cream Finance V2 lenders of ETH.
But would this happen immediately? No. Alpha Homora will be under the press to repay Iron Bank only when all Iron Bank lenders withdraw from the (ETH) vault. Before that, Iron Bank’s ETH is under collateralized (one ETH is one ETH less the pro-rata share of the loss due to Alpha Homora hack).
Beyond smart contracts, Alpha Homora seems to be willing to work out a solution to ensure Iron Bank lenders are not at a loss. And this is purely business negotiation. Code is law, but a good business needs goodwill. We trust that Alpha Homora will come out with a plan to mitigate this situation, for its own reputation and long-term business viability in the industry.
And, from here, we see in the crypto industry lending based on not purely collaterals, lending not purely based on codes. Credit is starting to form, and this is fundamental for the crypto industry to become a functional financial industry component.
(Serenity Team, Guest Writer, 15 Feb 2021, Twitter: https://twitter.com/SerenityFund)
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