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Hi Everyone,
Increasingly, finance professionals are starting to realize the disruptive nature of Decentralized Finance (DeFi), but clearly, we're not there just yet.
Currently, a plethora of new economic models are being evaluated to see which ones can stand both the test of time and the markets.
The original experiment that was built on the Ethereum network in 2014, as some of you may recall, ended in catastrophic failure as The DAO, which stands for "decentralized autonomous organization," was hacked and millions of dollars' worth of ether was stolen.
We later managed to recover those funds, but not without a significant cost.
More recently, billionaire-turned-NFT/crypto advocate Mark Cuban was involved in a project that blew up quite spectacularly.
Iron Finance has been offering a new algorithmic stablecoin named the IRON token on the Polygon blockchain and Binance Smart Chain for a few weeks now.
Although the stablecoin was designed to hold its value, instead of receiving a solid yield, investors have instead ended up with a proverbial iron fist.
Conventional stablecoins like tether or circle (USDT & USDC respectively) hold their dollar peg based on market psychology.
Investors know that one tether is worth one U.S. dollar, so if the price dips, they quickly buy it at a discount, or if the price goes slightly above $1, they will sell it short for a profit.
Thus, short-term scalp traders and algo traders have a clear incentive to enforce the peg.
With IRON, however, the peg was supposed to be maintained by other tokens. Both USDC and the Iron Titanium token (TITAN) provide the needed collateral for the Polygon network, while STEEL and BUSD supply the collateral required for Binance Smart Chain.
In order to mint new units of IRON, users would stake USDC and TITAN, in a 3:1 ratio, inside a smart contract.
For example, someone could stake 75 cents worth of USDC and 25 cents worth of TITAN.
Thus, as users issued more IRON, the price of TITAN rose. The problem came when a few whales (we still don't know who) decided to take their profits on TITAN, which inadvertently lowered the price of IRON.
Seeing the price of their stablecoins plummeting, more people joined in the selling, sending TITAN from a high of $65 to a low of around $0.000000035, and the stablecoin which was supposed to be pegged to $1 was last seen at 74 cents, after crashing to a low of almost 60 cents.
Where there was once a total of $2 billion locked in the network, there is now less than $9 million. Cuban was of course pissed.
Not only was he deeply invested, but he also encouraged others to invest in this project, despite the fact that the code was unaudited and the system had not gone through any serious stress tests. |
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| What can we expect from a guy who literally compared bitcoin to bananas less then two years ago? |
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Iron island regs
Clearly, Cuban was in over his head on this one, but asking for regulators to get involved in this is definitely not cool.
Sure, the space does need some sort of regulatory framework to continue growing, a fact that was highlighted well in this Cointelegraph overview, which collates the opinions of more than a dozen experts.
However, to expect lawmakers to come in and police specific projects that are so complex in nature that even many industry insiders struggle to understand them is simply not the way.
Thankfully, there is finally a man chairing the U.S. Securities and Exchange Commission who is qualified to offer guidance on how the government should approach crypto regulation without harming innovation.
Unfortunately, he's preoccupied at the moment with things like meme stocks, special purpose acquisition companies (SPACs), and the sale of brokerage order flow, the kind of problems that accompany a market flush with way too much cash and a horde of new retail investors.
SEC Chair Gary Gensler was interviewed on Bloomberg TV this morning. Crypto didn't even come up.
In a very real way, America has already been left behind.
As always, we welcome any questions, comments, or feedback. Feel free to keep sending them. Have a wonderful day.
Warm regards, |
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Mati Greenspan Analysis, Advisory, Money Management |
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