How risk coverage could have protected Mark Cuban
The tragedy of not-so-stablecoins
Another month, another exploit. That’s the harsh reality of the wild west of finance called crypto. In June, various cryptocurrency projects experienced epic crashes due to flaws in the designs of their protocol. One of these, Iron Finance, made headlines because for once, it wasn’t just retail investors but a high profile billionaire that got hit.
Mark Cuban has widely shared his enthusiasm for DeFi and has been heavily investing in the space several months now. One of these investments was in Iron Finance, a newly launched stablecoin project.
Him, and thousands of others who jumped on the trade because of his endorsement, lost close to all their money when a design flaw caused the economic model of Iron Finance to crash and burn. Cuban is now calling for regulators to protect him, but this could take years while the DeFi space won’t stop building and experimenting.
Fortunately, there are ways investors can protect themselves against these risks. Blockchain-based risk products help investors cover themselves from the myriad things that can go wrong in DeFi, and Bright Union is bringing them all under one roof. And as it’s shown over and over, DeFi investors can really use some extra protection.
Flaws, exploits and DeFi
DeFi is extremely exciting and has opened the floodgates for all kinds of economic experimentation. One of the areas that has attracted a lot of attention are algorithmic stablecoins. These are cryptocurrencies that are pegged to the US Dollar through various complex designs and algorithms.
The more complex a system is, the higher the likelihood of it failing and we’ve been seeing this a lot with algorithmic not-so-stablecoins. A lot of these experiments have to be tested in the wild, which ultimately will lead to the proper designs, but leaves a lot of investors left holding the bag in the meantime. So was the case with Iron Finance.
Iron Finance and Titan
Iron Finance is an algorithmic stablecoin project released on both Polygon and Binance Smart Chain. While the claims of security were high and the backing of Mark Cuban gave the project a lot of attention and investors, it still very much is an experiment.
The project’s stablecoin IRON is supposed to have a 1:1 peg to the US Dollar. This is made possible through a backing of 75% USDC and 25% by the project’s own token, TITAN. To mint IRON, investors have to deposit this ratio in USDC and TITAN and to redeem IRON stablecoins, investors deposit them and receive the collateral back in return.
From the start, things seemed to be going great for the project and TITAN shot up from roughly a dollar all the way to $65 dollars. But then, the price started going south, taking the whole system with it.
At the top, several large token holders started selling their TITAN. IRON lost its peg to the Dollar because of the drop in TITAN’s price and gradually, then all at once, investors started to redeem their IRON for the collateral and panic selling their TITAN, causing a death spiral for both the price of TITAN and the IRON stablecoin. Additionally, the TITAN selloff triggered the protocol’s algorithm to start issuing more and more TITAN, causing hyperinflation on top of a crashing price. Ultimately, the price of TITAN crashed to roughly $0. Here, you can find a detailed description of what exactly happened.
The economic design of the system proved to be flawed, yet you needed a PhD in mathematics to see that coming. The incentive system behind the protocol turned out to be its demise, but it needed to be used by thousands of people for this to surface. And Iron Finance is not the only one.
In what might be one of the most ironic names in crypto, SafeDollar collapsed all the way to $0 after an economic exploit. The Polygon-based stablecoin launched on June 14th with an experimental design that used various techniques to establish a peg to the Dollar.
Just two weeks after launching, the system suffered an economic attack in which its liquidity pools were exploited through a flaw in the security of the protocol. The attackers minted quadrillions of stablecoin units, sold them immediately and caused the price to sink to $0. They took off with $250,000 in USDT and USDC.
An over two year old project, Haven Protocol has set out to be an “offshore bank without banks” and allows for algorithmic stablecoins and private transactions. On June 24th, the team announced that a vulnerability in the smart contract was discovered, which they rapidly patched.
However, the patch did not fix the system, as the protocol was exploited during the subsequent four days. Attackers found a way to mint new tokens and sold these on exchanges, causing the price to drop and a loss of trust in the system. The team is still exploring the exploit and shared the details of what happened in their Discord Channel.
More DeFi, more risk
DeFi is at an exponential growth stage and many more new, experimental projects will come to market over the next months and years. It’s exciting, and potentially very lucrative, to get early into the DeFi game, but oh so risky. The ethos in DeFi is that people will only truly understand the risks if they lose money, a hard lesson Mark Cuban also had to learn.
Understanding the true risk of DeFi products is close to impossible for 99.9% of crypto investors, including Mark Cuban. No matter what a team claims to have accomplished, risk is what remains after you’ve thought of everything and any system in DeFi will constantly be under attack as the potential returns for hackers can be huge.
The regulators are not going to protect DeFi investors and there is no consumer protection. We can, however, solve this problem from within the industry.
Protect yourself with Bright Union
Bright Union aggregates all kinds of risk products offered in the crypto industry. Just in June, three different algorithmic stablecoins got exploited. There are already risk products on the market that could’ve protected investors from this. For example, our partner Nexus Mutual already offers protection against the failure of a large selection of individual protocols.
As an aggregator, we will offer these and many more risk products to help the DeFi investor. Once we’ve launched, Bright Union members can start protecting themselves against the multitude of complex risks in the market. We bet Mark Cuban will be glad to hear that.
About Bright Union
Bright Union is launching the world’s leading aggregator and accelerator for the crypto risk markets. Our mission is to make the crypto risk markets work. On our decentralized crypto coverage platform, crypto users can cover their assets, stake and cover the community, and earn guaranteed yield through Bright Staking with embedded coverage.
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