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Iron Finance’s “Rug-Pull” and System Failure

Iron Finance — the DeFi protocol that managed to gather more than US$2B in TVL at its peak — suffered a bank run which led to a complete collapse of its token TITAN, losing 100% in a day.

IRON is a partially-collateralized stablecoin, as we described in the previous post, it is only 75% backed by USDC, while the other 25% of its value is backed by the value of TITAN. The protocol is a fork of FRAX Finance.

The tokenomics of Iron Finance is such that when new IRON stablecoins are minted, the demand for TITAN increases, since 25% of IRON is created by burning TITAN.

Conversely, if the value of TITAN falls to zero rapidly such as a series of TITAN sell orders in the market, the system collapses as the IRON peg becomes unstable.

What happened during the 24 hours of the system crash was that several large holders tried to withdraw liquidity from the IRON/USDC LP, selling TITAN tokens for IRON and USDC instead of redeeming IRON, causing IRON to price off-peg temporarily.

When many users saw the large sells, they panicked and started to redeem IRON and sell TITAN, causing TITAN’s spot price to fall below its 10-min TWAP price based on the price oracle.

The pegged value of IRON also fell below US$1.

TITAN’s price fell rapidly

As the selling further decreased the value of IRON, it triggered the protocol mechanism that mints TITAN and removes liquidity in a bid to stabilize IRON to $1, creating an arbitrage opportunity between the price difference of IRON and TITAN, and flooded the market with more TITAN tokens and further destablised IRON’s peg.

IRON’s peg also fell rapidly to its collateral ratio backed by USDC (75%, as the value of TITAN approached 0)

All in all, the recursive actions of IRON going off peg, more IRON redemptions, large TITAN mints to stablize the peg led to its rapid downfall within hours.

Iron Finance wasn’t really that iron-clad after all, and many users lost funds investing in the IRON or TITAN token.

We strongly advise against high risk and speculative investments in DeFi, as a 1.5% daily yield is not worth the 100% portfolio risk.

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