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TLDR below. This is not financial advice.
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Iron Finance is an Algorithmic Stablecoin project using the model of Frax Finance, including 2 main tokens, $IRON (stablecoin) and $TITAN (Governance token).
Before the bank rune, Iron Finance is now the most prominent project on the Polygon ecosystem with a TVL of nearly $2 Billion, before that Iron Finance was also developing products on BSC but Polygon is the main market of the project.
On Polygon, the project had achieved great achievements, only in the first half of June:
TVL increased to $2 Billion.
$TITAN increased by almost $50, from $1.33 to a peak of $64.19.
It is now worthless.
Iron Finance Explained
IRON is a partially collateralised mechanism so it uses $USDC and $TITAN which is the secondary token created within the system. Every $IRON is valued at one dollar. It could be like 70% $USDC and 30% backed by the value of $TITAN.
$TITAN helps to support the price of $IRON and this 70-30 split is calculated based on an effective collateral ratio and is recalculated based on demand and supply. The end goal of this entire mechanism is to figure out the monetary policy to support $IRON as a stablecoin.
IRON VS FRAX
We want discuss about $FRAX because we did a big report on stablecoins together with Lemniscap and Bocconi university where we analysed eight different algo stablecoins.
$FRAX was the main protocol that created this design, then $IRON came along which was basically a copy of that but was built on a different chain. They built it on BSC and the Polygon network.
If They Are The Same Then Why Did $FRAX Succeed Whereas IRON Failed?
The similarity is that both $FRAX and $IRON use partial collateral or partial reserve and both have the same reserve which is $USDC.
The key difference is that with $FRAX the base mechanism is the same but it moved on to create version 2 and updated the system to make it more robust and efficient, which $IRON did not do. They stayed on V1.
Great concept, great idea, but poor design.
That is where everything started to fail.
Causes of Failure:
1. Uncontrolled supply
The whole analysis in the white paper is that the total planned emission for $TITAN was 1 billion tokens with 70% is held by the community and 30% by the team and treasury.
If you look into the $TITAN supply, over the course of the day of 17th June there was a huge increase and by the end of 17th June, 34 trillion tokens were circulating. If we take a closer look you can see that two big minting periods increased the supply uncontrollably. There was this massive supply inflation of the token and the prices fell and went from $60 to $0.
2. IRON & TITAN relationship
The collateral ratio of 70% $USDC and 30% $TITAN is a good design. That is basically the mathematical relationship to link $IRON output with $TITAN input. However, there is not much definition of $TITAN as output and $IRON as input, so there is not much governance and relationship definition around $TITAN itself — it has not been well designed.
3. TITAN Mechanism Design
The reason $TITAN exists is to help to manage volatility and any insane activities in the secondary market so that $IRON can remain at one dollar. The problem is that there is not a system or a mechanism designed into $TITAN to capture the secondary market information, take it in and update the system to update the supply of $TITAN. Even without this whole uncontrollable supply increase, $TITAN would have still failed because it is just not designed well enough. There are a lot of different kinds of economic exploits that can happen.
One thing that I would suggest is PID. This is where you are taking in different kinds of information updates and changing knobs allowing you to change the process and make sure that the entire system is robust. It is a closed-loop system, so when you are taking in new information and adjusting different knobs, then the other knobs have to be balanced too.
Let’s take it back to $FRAX, which has the Frax Share Token. This token is well designed because it takes in information from the secondary market and brings it into the primary market to adjust and update the system. $TITAN does not have this feedback loop and so the outcome, which is $IRON, will just not maintain that one dollar stability.
2 Tokens = 2 Economics Designs
You do not have to design the market from scratch because both tokens exist in the same market, but you must design the mechanism and token design for both tokens. You do not have to do them both at once. You do the first one which is the priority and then move on to the second priority. This is how you continuously improve in an open-source system. Furthermore, once you finish the priority token you cannot just forget about the rest, because if the rest of the priorities are not done the primary token will not be robust enough to be sustainable.
Secondary Market Information To Primary
Ssecondary market information needs to be taken in to update the primary market to make it more robust. This is how you create anti-fragile systems.
Formula ≠ Good Design
Formula does not automatically mean good design. A lot of different protocols push a lot of formulas out, and then you realise that the formulas are basically re-purposed or rewritten differently on different pages, so they are not providing any value.
Listen on podcast if you prefer audio version.
Iron Finance is a project using Frax’s Stablecoin model and Pancake Finance’s tokenomics, the project successfully attracted a large number of initial participants, but quickly failed to maintain the number of users. there.
To summarise the operating model of Iron Finance, we have some main ideas as follows:
Iron Finance uses Frax Finance’s algo stablecoin model.
Farms are Iron Finance’s most attractive product, by sharply increasing Incentives input, the project has successfully attracted users and accelerated the project’s flywheel.
Incentives help Iron Finance develop very quickly, but also harms it also pushes the project to a deep cliff.