Titan Token Crash. What Went Down?
Billionaire investor and reality TV personality Mark Cuban fell victim to a rug pull last week, or was it?
The debacle has been touted as the crypto world’s most prominent bank run initiated by TITAN token founders abandoning the project prematurely, sending the token on a steep fall from $60 to $0 in just one day.
However, this may not be the correct narrative.
TITAN is part of a multi-chain partial-collateralized stablecoin ecosystem developed by Iron Finance. As the price of TITAN fell to zero due to IRON losing its peg due to the plummet, Iron Finance was prompted to call all holders including Mark Cuban to withdraw liquidity from pools.
Much of the allure of TITAN was in its rewards, particularly due to its high yield farming rates for holders, which was the primary catalyst for the skyrocketing price above $60.
What steps can you take to avoid building positions in these types of projects?
First of all, review your chosen exchange.
Crypto exchanges are the intermediary between traders and projects and facilitate the transfer of capital from suppliers to borrowers. They are also supposed to do their due diligence to avoid populating their listings with potential scams.
ProBit Global does due diligence before listing new tokens to reduce the frequency of these unfortunate circumstances from surfacing and hurting the community finances. Step one to reducing the likelihood of falling victim to abandoned projects or rug pulls is to find a reputable exchange to work with.
This is half the battle.
Rug Pulls Are Elaborate Facades
A rug pull is a malicious maneuver where cryptocurrency developers abandon a project with investors’ funds. Rug pulls typically occur within the DeFi ecosystem when a token is created and listed on a DEX and paired with a leading cryptocurrency.
The concept of a “soft rug” has been on the rise which involves developers dumping tokens on the open market and completely abandoning a project. A key difference is the fact that liquidity pools remain intact.
To illustrate how a rug pull works, let’s say a token was created and paired with ETH.
Once a significant amount of traders swap their ETH for the scam token, creators drain the liquidity pool and holders are left with a worthless token. Creators may even go as far as creating a brand, marketing it, and driving trader interest on social media to drive up liquidity and falsely nurture trader confidence.
Rug pulls are often hosted on DEXs as these platforms are much easier to manipulate than centralized exchanges. Developing tokens on open-source blockchain protocols is relatively easy, presenting a lower barrier of entry and enabling fraudulent actors.
These two factors significantly increase the risk of trading these tokens.
DEXs algorithmically determine token prices contingent upon available balances according to AMM structure. Therefore, consulting pool liquidity and the token lock time, if any, should be one of the first project aspects you review. Most reputable projects will have a token lock of at least one year, if not longer, which shows their continued commitment to the project’s success.
Finally, if a token is shooting to the moon, 10, 25, or 50xing in a matter of 24 hours, this should be a sign to dig deeper.
Unfortunately, scammers often employ this strategy as a deceptive trick to drive trader FOMO and generate increased liquidity, which can be subsequently rugged.
It’s important to reiterate that much of this risk can be remedied by choosing a reputable, centralized exchange that does its due diligence. Of course, picking a reputable exchange is no replacement for diligent unbiased research, but it sets you up for trading success.
Building a successful crypto trading portfolio doesn’t have to be complicated. Check out how to construct a winning portfolio in 2021 here.
How The Precipitous Fall Began
Iron Finance is a fork of Frax Finance, and its token IRON has the following built-in rules. Holders can exchange $0.75 USDC and $0.25 worth of TITAN for 1 IRON. The USDC is subsequently allocated to a vault, and the TITAN is burnt to maintain price values.
Simple, right?
The opposite can occur as well where 1 IRON is sold for $0.75 and $0.25 worth of TITAN at any time. The respective USDC will be removed from the vault and $0.25 of TITAN will be minted, which you can then sell back to receive $1.
Because IRON is a stable coin and its trading volume was low, Iron Finance began giving free TITAN rewards to IRON holders. Holders were pleased as the returns were respectable for the time being. However, because IRON can only be minted when TITAN is burned, TITAN prices exploded.
Unfortunately, a supply and demand dilemma developed. When TITAN prices got too high, participating farms started to produce excess token volumes. At the peak of $64, over $48M worth of TITAN was minted in one day.
Insane.
The supply significantly surpassed the demand, inciting a price decrease. There were not enough people minting IRON to burn TITAN flooding the market. When TITAN values began wavering, holders began selling off their positions of TITAN, initiating the cascading crash and leading to IRON losing its peg and dropping down to .94.
TITAN employs a 10-minute time-weighted average price (TWAP) to determine how much one TITAN is worth when redeeming one IRON. For example, when TITAN dropped from 64 to 48 in 1 minute, a decrease of 25%, the TWAP integration still pings the protocol at a price around 60 for those 10 minutes.
Essentially, the price oracle experienced delays in feeding TITAN price which led to an incorrect value being used to calculate TITAN redemption. This all but made arbitraging impossible which is a key component towards maintaining a consistent peg.
Anyone exchanging 1 IRON for 0.75 USD received $0.25 worth of TITAN at $60, which was actually only worth $0.2 at that moment at $48. This led to panic selling where the stable coin continued to stray further from the pegged currency value, further breaking the system.
What further exacerbated the outcome is that new TITAN is minted every time IRON redemptions are completed by traders. Thus, as TITAN prices continued to trend lower, more and more TITAN got minted for every single IRON redemption.
You still with me?
This elicited extreme levels of hyperinflation for TITANs value. Think of a central bank or the situation in Venezuela, where a government has substantial debts to pay but no liquid capital.
What do you do? Print more cash and send the value of the dollar into the gutter.
Every occurrence of an attempted consolidation would not elicit any bounce due to the relationship TITAN has with IRON. It is, unfortunately, a flawed system and an economic failure.
Was this a rug pull?
No. It looks like this project was a failed experiment with rules that were clearly outlined before traders got involved. For the project to be identified as a rug, there would have had to be explicit deceptive behavior.
What happened was everything that possibly could have gone wrong in tokenomics did.
This is a bank run, a phenomenon characterized by a mass exodus of trader capital in fear the investment will fail. A bank run is a legacy finance expression often thrown around to describe situations where investors withdrew their deposits simultaneously due to concerns regarding the bank’s solvency.
The Iron Finance crash is not alone and is a part of a growing string of algorithmic stablecoin experiments that have failed. DeFi stablecoin projects attempting to hold a peg to fiat currencies through arbitrage opportunities and liquidity is challenging. Developers just don’t have it figured out yet.
Mark Cuban has called for regulation to better define what a stable coin is, but the fact of the matter is that Mark knowingly signed up for what was ultimately a big experiment. Had traders dug deeper into the fine print, they may have realized the system was flawed from the beginning.
