A DeFi Bank Run: Iron Finance, IRON Stablecoin, and the Fall of TITAN
17 Pages Posted: 19 Jul 2021 Last revised: 21 Jul 2021
Date Written: July 16, 2021
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: Suggested Citation