A DeFi Bank Run: Iron Finance, IRON Stablecoin, and the Fall of TITAN

17 Pages Posted: 19 Jul 2021 Last revised: 21 Jul 2021

See all articles by Kanis Saengchote

Kanis Saengchote

Department of Banking and Finance, Chulalongkorn Business School

Date Written: July 16, 2021

Abstract

Bank runs are a natural phenomenon for financial institutions that issue fixed value liabilities (e.g. money) that are backed by assets with uncertain value. I analyze Iron Finance, a decentralized finance (DeFi) protocol that issues stablecoin (a token with fixed nominal exchange rate: IRON) liabilities in exchange for a basket of other tokens (including a token issued by the protocol itself: TITAN). A combination of mathematical algorithms and incentive to arbitrage is used to maintain the exchange rate peg, but a shock to the protocol sent it into a downward spiral – much like a bank run. The incentives built into the protocol to defend the peg exacerbated its unravelling, raising the challenge of how DeFi protocols can address this vulnerability while remaining decentralized.

Keywords: DeFi, stablecoin, bank run, self-fulfilling panic

JEL Classification: E00, G00, G23

Suggested Citation

Saengchote, Kanis, A DeFi Bank Run: Iron Finance, IRON Stablecoin, and the Fall of TITAN (July 16, 2021). Available at SSRN: https://ssrn.com/abstract=3888089 or http://dx.doi.org/10.2139/ssrn.3888089

Kanis Saengchote (Contact Author)

Department of Banking and Finance, Chulalongkorn Business School ( email )

Bangkok, 10330
Thailand

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