August 31, 2021 |James Messi
Prominent cryptocurrency investor and billionaire Mark Cuban had recently voiced his sentiment on stablecoin tokens and their immediate need for regulatory clarity. In what appeared to be a heavy loss on the Iron Finance protocol, the crypto tycoon took to Bloomberg his call for a regulatory body responsible for overseeing stablecoins and their scope in the decentralized finance (DeFi) space.
DeFi proponent Cuban viewed his losses as a “rug pull,” after Iron Finance’s native cryptocurrency Titan went near zero. In a matter of hours, Titan’s value went from a high of $64 to a record low of 0, prompting Cuban to echo the need for a regulatory system.
“There should be regulation to define what a stablecoin is and what collateralization is acceptable. Should we require $1 in U.S. currency for every dollar, or define acceptable collateralization options, like U.S. treasuries,” he said. In addition to this, he took his sentiments to Twitter and tweeted, “got hit like everyone else.”
After the heavy selloff that sent Titan to zero, its corresponding coin Iron also plunged below its $1 parity price. Since the protocol on which the two coins function was heavily dependent on a Time-Weighted Average Price, intensive market activity compromised the collateral ratio and therefore sent the coin lagging behind volatility.
In turn, the crash caused a bank run, wherein speculators withdrew their tokens from the protocol. Even two days after the drop, Titan was still laying flat at ground zero.
While Cuban blamed the absence of tight oversight for his losses, he partly held himself accountable for his indolence to conduct the necessary research. “Even though I got rugged on this, it’s really on me for being lazy. The thing about DeFi plays like this is that it’s all about revenue and math and I was too lazy to do the math to determine what the key metrics were,” he said.
In a response released by Kraken CEO Jesse Powell via Twitter, he noted that the absence of stablecoin regulation was not the issue. Instead, he went on by saying, “Not doing your own research and YOLOing into a terrible investment because your time was worth more than your money is your problem.”
Stablecoin’s Regulatory Trajectory
Both the United Kingdom and the European Union were already layers deep in exploring the stablecoin field. While these countries have their own set of protections for consumers and financial stability, these remain inadequate as they are solely focused on asset backing, leaving some harmful marketing and terminology issues.
Far from U.K.’s fully collateralized mandate on cryptocurrencies, the E.U. is far more nuanced as it validates three kinds of stablecoins. The dilemma that this introduced came parallel with Cuban’s issue in marketing: detrimental for mainstream consumers taking them at face value and who are oblivious about the threats associated with stablecoin tokens.
“All tokens are not created equal. In some projects, there is a risk that everything goes to zero. We urge those investing in the ecosystem to educate themselves in these new financial projects. Never invest what you’re not prepared to lose in entirety,” Tether Limited chief technology officer Paolo Ardoino said in a separate interview.
The United States was also keeping up with the ever-evolving field, and it proposed the “STABLE act” in the fourth quarter of 2020, which mandates stablecoin issuers to acquire bank chartings and comply with conventional banking guidelines. Following the major crash last month, head of the Federal Reserve Jerome Powell also emphasized investors’ necessary attention as the stablecoin space continuously grows.
Going to Zero
The rise of decentralized finance has paved the way for many tokens, one of which is Titan. Prior to the decline, Titan’s consistent highs prompted decentralized exchanges to offer a 4000 percent yields- quotations that were too good to be true. However, this DeFi token marked its lowest level after hitting zero hours after it saw a high of $64.04. Not only had the decline in stablecoin price sent Cuban to media uproar, it also rattled retail investors.
While violent market fluctuations are highly common, complete loss of value has to be the most unusual trading occurrence. Even Iron Finance dubbed the contraction as the world’s “first large-scale crypto bank run.” But contrary to Cuban’s claim that the crash was a “rug pull”, Iron Finance seemed to be taking seriously its goal of realizing another type of stablecoin called Iron. This works algorithmically ahead of Titan as it is fully decentralized, self-stabilizing, and is valued with 75% of USDC and 25% of Titan.
But its reliance on Titan was deemed problematic as a decline in any of the two would send them down in unison. To make things worse, both of their smart contracts temporarily malfunctioned during the crash, completely restricting coin holders from withdrawing their tokens.
The difficulty in writing steel-hard smart contracts remains a struggle. Add to that is their interactive trait that made them susceptible to hacking and accessible for public intervention. As for Iron’s smart contracts, “Its model was deeply flawed from a tokenomics perspective. More so, its code was un-audited, and the system was never properly stress-tested,” said Mati Greenspan, portfolio manager and founder of Quantum Economics.
In addition to his previous statements, Cuban also told CNBC that the crash was derived from a poorly run venture. “I think some people fail to realize that DeFi is a business like all others,” Cuban said.
“They need to create revenues, and those revenues need to cover their cost of customer and capital acquisition and provide reserves and processes, which Iron did not sufficiently do, to be able to survive a significant loss of customers and withdrawal of capital,” he added.
Titan and Iron’s Roadmap
Iron Finance’s post-mortem press release stated the company’s plan of outsourcing third-party analysts to review the protocol; in a bid to understand the circumstances that fueled the decline.
While terminology and marketing stood as the most pressing issues, Risk implosion also emphasized other threats that might send the crypto yet again into violent spirals. Market panic, for one, might occur should there be an impending mass redemption. Rapid liquidation might also arise from this, which would gravely cause market dislocation.
Should the market rise beyond expectations, values would be higher, from where risks would root out as capitalizations surge to unprecedented levels. Nonetheless, the increase brought about by Decentralized Finance means lesser friction and more stable payments for blockchain applications.