What is the worst that could happen?
How about your coin going from 65 dollars to zero in one day? Ok, maybe not quite zero, just $0.000000035. Close enough. That is what happened to the Iron Titanium Token (TITAN) on Wednesday.
(On a side note, MarK Cuban was an investor, but, “lucky” for him, he got out just before this all went down ... according to his tweet. It is good to be the whale.)
So what happened? TITAN’s price fell from 65 to 60 on Wednesday and triggered a lot of the whales to start selling off. This essentially started a “Bank Run” and everyone started selling.
This is not unheard of in the crypto world or the regular world, but, in this case there was more to it. Because of the tokenomics of this particular coin, it gets really bad.
A brief description from Coindesk of how TITAN is pegged to IRON:
The project was attempting to boot a partially collateralized stablecoin known as IRON. The stablecoin, in turn, consists of Circle and Coinbase’s stablecoin, USDC, as well as TITAN, and was pegged to $1. Stablecoins are cryptocurrencies whose value is attached to financial assets such as commodities or government-issued currency in a bid to keep them stable.
In the case of IRON, which receives its collateral backing from TITAN, users may mint new stablecoins through a mechanism on Iron Finance’s network by locking up 25% in TITAN and 75% in USDC.
Due to how the tokenomics of this particular DeFi project functions, when new IRON stablecoins are minted, the demand for TITAN increases, driving up its price. Conversely, when the price of TITAN falls dramatically, as was the case on Wednesday evening, the peg becomes unstable.
So why is this so bad? Well, as selling continued and the price dropped, it triggered the stablecoin’s mechanism that mints TITAN and removes liquidity to try and stabilize it at $1.
This caused an arbitrage opportunity. Essentially, the whales could redeem a token worth 90 cents for 75 cents of stablecoin and 25 cents of TITAN. This meant an instant 10 percent profit every time the did it. However, this required minting new TITAN every time. You can read this tweet for it to be explained in depth.
The tokenomics of this coin were essentially what ruined it. In a loop where IRON was worth 1USD because it was backed by 75% USDC and 25% TITAN, but, TITAN’s value was that it was worth 25% of IRON. Or in math terms A=B because B=A.
The price did rebound a little, but, with what happened I can’t see any long term solution to this...unless you are a whale. It is an interesting case that should be noted as a need to understand what you are getting into with any investment.
Resources
https://www.coindesk.com/iron-finance-defi-titan-iron-price-drop