Decentralized finance (DeFi) is one the biggest and most exciting spaces in the crypto world.
Yield Farming in particular is very popular due to the ability to earn passive income by buying and locking up your crypto vaults to be used by defi applications.
Iron Finance is a stablecoin protocol that enabled investors to earn massive APY's in their liquidity pools. Their stablecoin IRON is backed partially by collateral (other stablecoins) and by the cryptocurrency TITAN.
This post will look at what yield farming is, Iron Finance and why TITAN's price collapsed.
What is Yield Farming?
Yield Farming, also known as liquidity mining is a way for investors to earn passive income.
Yield Farming works by investors purchasing and locking up cryptocurrency pairs in liquidity pools.
These liquidity pools serve different purposes depending on the platform:
- Decentralized Exchanges (DEX's) need liquidity so users can easily buy and sell different cryptocurrencies without the need for an orderbook.
- Decentralized lending systems like AAVE have Lending Pools where investors can provide liquidity for Flash Loans.
Yield Farming is the main source of liquidity for DeFi applications. In return for providing liquidity, investors are rewarded in tokens with annual APY's ranging from 3 - 10%.
However there's Liquidity Pools which provide astronomical APY's, ranging from 1,000% to over 4,000,000,000%.
Screenshot from Reddit of crazy APY's for Iron Finance.
Yes that's over 4 billion percent annual APY. The thing is, these pools don't last very long and below we'll see why.
What is Iron Finance?
Iron Finance is a multi-chain stablecoin protocol with it's own stablecoin called IRON.
IRON is a partially collateralized stablecoin that exists on multiple blockchains, namely the Binance Smart Chain and Polygon (Matic) blockchain.
Stablecoins are cryptocurrencies which are pegged to the US dollar, so the price must stay stable at a value of $1.
It's common for the price to fluctuate a little below or above the $1 value ($0.98 - $1.02), but if the value strays too far ($0.75 - $0.50 or lower), the stablecoin loses it peg, meaning it's not worth one US dollar anymore.
Iron Finance's stable coin is called Iron ($IRON) and it's backed by collateral including BUSD, USDT and USDC, the rest of it's value is backed by TITAN a volatile cryptocurrency that is used to mint new IRON tokens.
Through Iron Finance users could either mint or redeem tokens. When minting tokens, investors bought TITAN and USDC, and locked those into it's respective liquidity pool (TITAN-USDC).
In exchange, they're paid interest in the form of IRON tokens which can be sold and reinvested into the liquidity pool to increase the amount of IRON earned daily.
Redeeming is when investors sell (or "redeem") their IRON for TITAN or USDC. Now, TITAN-USDC wasn't the only liquidity pool available.
The most popular pools where on the Polygon network with daily APY's ranging from 1.5% to 5%.
Iron Finance's most popular liquidity pools:
- IRON-USDC - 1% - 2% daily APY before collapse.
- TITAN-MATIC - 4% - 5% daily APY before collapse.
Investors could access these pools via DeFi platforms like Beefy Finance and Polycat.
These high returns are very attractive to investors for multiple reasons:
- Transaction fees on the Polygon (Matic) network are very cheap costing less than 0 MATIC per transaction, basically almost free to use.
- A $10,000 investment would net you $200 daily on the IRON-USDC pair and $400 daily on the TITAN-MATIC pair.
Since Beefy and Polycat are auto-compounders (they reinvest the interest earned) your earnings would look like this after 5 days:
- A $10,000 investment would net an investor $11,040.80 ($1,040.80 profit) after 5 days on IRON-USDC.
- A $10,000 investment would net an investor $12,166.52 ($2,166.52 profit) after 5 days on TITAN-MATIC.
- A $100,000 investment would net an investor $110,408.08 ($10,408.08 profit) after 5 days on IRON-USDC.
- A $100,000 investment would net an investor $121,665.29 ($21,665.29 profit) after 5 days on TITAN-MATIC.
The main risks lie with the TITAN token losing it's value and IRON losing it's peg which would cause investors funds to decrease in value.
What happened with Iron Finance and TITAN?
As mentioned earlier in this post, large APY returns don't last forever. On the 16th of June the value of TITAN started to drop, reaching $14 by 17th of June before dropping to below $0.
The main cause of this collapse is referred to as a "bank run", this is when a large number of customers withdraw their funds from a bank, making it insolvent.
In this case, large investors (whales) removed their tokens from Iron Finance's liquidity pools, causing the value of TITAN to plummet which also caused IRON to lose it's peg to the US dollar.
Whales were removing liquidity from IRON-USDC pools, selling their TITAN for IRON and then selling that IRON for USDC. This caused TITAN to drop from $65 to $30 in 2 hours.
Since IRON is partially backed by TITAN, IRON lost its peg, dropping to around $0.70.
The price recovered within an hour to $52 and IRON regained it's peg, but it wasn't over yet.
At around 3pm, more large investors started to redeem IRON and sell their TITAN.
Due to the large number of IRON being redeemed, huge amounts of TITAN was being minted which flooded the market.
The increasing TITAN supply, combined with the constantly falling price, created a negative feedback loop:
- Investors redeem IRON, which mints TITAN, thus flooding the market.
- Investors sell their newly minted TITAN.
- The price of TITAN on DEX's falls due to selling pressure.
- Since IRON is partially backed by TITAN, IRON's price falls and it loses it's peg.
- More investors panic sell TITAN, causing the price to drop further.
- Since the price of TITAN keeps falling, IRON cannot regain it's peg.
- Since IRON cannot regain it's peg, investors mint more TITAN to sell.
As you can see it's a vicious cycle of investors minting and selling TITAN, causing IRON to lose it's peg, which reinforces the previous behaviour.
Now the price of TITAN is less than a dollar and IRON is worth around 75 cents.
Final Thoughts
If something seems to good to be true, it most likely is.
If you're interested in yield farming I recommend sticking to safer liquidity pools with lower and more stable APY's.
If yield farming isn't your thing, you can also invest into the cryptocurrencies which power defi and yield farming platforms such as:
- Polygon (MATIC)
- Ethereum (ETH)
- Binance Coin (BNB)
- AAVE (AAVE)
- Curve (CRV)
- Yearn Finance (YFI)
- Compound (COMP)
You can invest into these cryptocurrencies with the resources below.
I hope you enjoyed this story, feel free to check out the useful resources below:
CEX Exchange — Exchange where you can use cash to buy Bitcoin, Ethereum, Polygon (MATIC), Sushi Swap (SUSHI), Uniswap (UNI), Curve DAO (CRV), AAVE (AAVE), Compound (COMP), Yearn Finance (YFI), and more from anywhere in the world. Available worldwide
BitPanda — Exchange where you can use cash to buy Bitcoin, Ethereum, Chainlink (LINK), Uniswap (UNI), AAVE (AAVE), Compound (COMP), Yearn Finance (YFI) and many more cryptocurrencies. Only available in Europe, Canada, Mexico and parts of Asia, South America & Africa for now.
Binance Exhange - Exchange where you can buy Binance coin (BNB) and other cryptocurrencies using ETH and BTC.
You can also keep up with me on Twitter.
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