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Decentralized Finance (DeFi) is one of the biggest and most exciting spaces in the crypto world.
Yield farming in particular is very popular due to the possibility of earning passive income by buying and locking your crypto vaults for use by challenge apps.
Iron Finance is a stable protocol that has allowed investors to earn huge APYs in their cash pools. Their IRON stablecoin is backed in part by collateral (other stablecoins) and the TITAN cryptocurrency.
This article will look at what Yield Farming, Iron Finance is, and why the price of TITAN fell.
What is yield farming?
Yield farming, also known as cash extraction, is a way for investors to earn passive income.
Yield Farming works by buying and locking cryptocurrency pairs into cash pools.
These liquidity pools have different purposes depending on the platform:
Decentralized Exchanges (DEX) need liquidity so that users can easily buy and sell different cryptocurrencies without the need for an order book. Decentralized lending systems like AAVE have loan pools where investors can provide liquidity for flash loans.
Yield Farming is the main source of liquidity for DeFi applications. In return for providing liquidity, investors are rewarded in tokens with annual APYs ranging from 3-10%.
However, there are liquidity pools that provide astronomical APYs ranging from 1,000% to over 4,000,000,000%.
Crazy APY’s Reddit screenshot for Iron Finance.
Yes, that’s over 4 billion percent of APY annually. The point is, these pools don’t last very long and below we’ll see why.
What is Iron Finance?
Iron Finance is a multi-chain stablecoin protocol with its own stablecoin called IRON.
IRON is a partially collateralised stable coin that exists on several blockchains, namely the Binance Smart Chain and Polygon (Matic) blockchain.
Stablecoins are cryptocurrencies pegged to the US dollar, so the price must remain stable at a value of $ 1.
It is common for the price to fluctuate a bit below or above the value of $ 1 ($ 0.98 – $ 1.02), but if the value moves too far ($ 0.75 – 0.50 $ or less), the stablecoin loses its peg, which means it is no longer worth one US dollar.
Iron Finance’s stable coin is called Iron ($ IRON) and it is backed by collateral including BUSD, USDT and USDC, the rest of its value is backed by TITAN, a volatile cryptocurrency used to strike new tokens. IRON.
Thanks to Iron Finance, users could either coin or exchange tokens. When minting tokens, investors bought TITAN and USDC and locked them in their respective cash pool (TITAN-USDC).
In exchange, they receive interest in the form of IRON tokens which can be sold and reinvested in the cash pool to increase the amount of IRON earned daily.
Redemption is when investors sell (or “buy back”) their FER for TITAN or USDC. Now, TITAN-USDC was not the only cash pool available.
The most popular pools are found on the Polygon network with daily APYs ranging from 1.5% to 5%.
Iron Finance’s most popular liquidity pools:
FER-USDC – 1% – 2% Daily APY before collapse.TITAN-MATIC – 4% – 5% Daily APY before collapse.
Investors could access these pools through DeFi platforms like Beefy Finance and Polycat.
These high returns are very attractive to investors for a number of reasons:
Transaction fees on the Polygon (Matic) network are very cheap and cost less than 0 MATIC per transaction, basically almost free. An investment of $ 10,000 would earn you $ 200 per day on the IRON-USDC pair and $ 400 per day on the TITAN-MATIC pair.
Since Beefy and Polycat are automatic compounds (they reinvest interest earned), your earnings would look like this after 5 days:
An investment of $ 10,000 would net an investor $ 11,040.80 ($ 1,040.80 profit) after 5 days on IRON-USDC. An investment of $ 10,000 would net an investor $ 12,166.52 (profit of $ 2,166.52) after 5 days on TITAN-MATIC. An investment of $ 100,000 would net an investor $ 110,408.08 ($ 10,408.08 profit) after 5 days on IRON-USDC. An investment of $ 100,000 would net an investor $ 121,665.29 (profit of $ 21,665.29) after 5 days on TITAN-MATIC.
The main risks lie in the loss of value of the TITAN token and the loss of its anchoring by IRON, which would result in a decrease in the value of investors’ funds.
What happened with Iron Finance and TITAN?
As mentioned earlier in this article, big APY returns don’t last forever. On June 16, the value of TITAN began to fall, reaching $ 14 on June 17 before falling below $ 0.
The main cause of this collapse is called a “bank run”, which is when a large number of customers withdraw their funds from a bank, making it insolvent.
In this case, the large investors (whales) withdrew their tokens from Iron Finance’s liquidity pools, causing the value of TITAN to fall, which also caused IRON to lose its peg to the US dollar.
The whales were removing cash from the IRON-USDC pools, selling their TITAN for IRON, and then selling that IRON for USDC. This took TITAN from $ 65 to $ 30 in 2 hours.
Since IRON is partially backed by TITAN, IRON has lost its foothold, falling to around $ 0.70.
The price recovered in an hour to $ 52 and IRON was back to its roots, but it was not over yet.
Around 3 p.m., more and more big investors started buying IRON and selling their TITAN.
Due to the large number of FERs traded, huge amounts of TITAN were minted which flooded the market.
TITAN’s growing supply, combined with steadily falling prices, has created a negative feedback loop:
Investors buy out IRON, which hits TITAN, flooding the market. Investors sell their newly minted TITAN. TITAN’s price on DEX falls due to selling pressure. Since IRON is partially backed by TITAN, the price of IRON drops and it loses its peg. The more investors panic to sell TITAN, which further lowers the price. As the price of TITAN continues to fall, IRON cannot regain its foothold. Since IRON cannot regain its foothold, investors are riding more TITAN for sale.
As you can see, this is a vicious cycle of investors hitting and selling TITAN, causing IRON to lose its foothold, which reinforces the previous behavior.
Now the price of TITAN is less than a dollar, and the FER is worth around 75 cents.
Final thoughts
If something sounds too good to be true, it most likely is.
If you are interested in yield farming, I recommend that you stick to safer cash pools with lower and more stable APYs.
If yield farming isn’t your thing, you can also invest in cryptocurrencies that power challenge and yield farming platforms such as:
Polygon (MATIC) Ethereum (ETH) Binance Coin (BNB) AAVE (AAVE) Curve (CRV) Yearn Finance (YFI) Compound (COMP)
You can invest in these cryptocurrencies with the resources below.
Hope you enjoyed this story, feel free to check out the helpful resources below:
CEX ExchangeExchange where you can use money to buy Bitcoin, Ethereum, Polygon (MATIC), Sushi Swap (SUSHI), Uniswap (UNI), Curve DAO (CRV), AAVE (AAVE), Compound (COMP), Yearn Finance (YFI), and more from anywhere in the world. Available worldwide
BitPandaExchange where you can use money to buy Bitcoin, Ethereum, Chainlink (LINK), Uniswap (UNI), AAVE (AAVE), Compound (COMP), Yearn Finance (YFI) and many other cryptocurrencies. Only available in Europe, Canada, Mexico and parts of Asia, South America and Africa at this time.
Binance Exchange – Exchange where you can buy Binance Coins (BNB) and other cryptocurrencies using ETH and BTC.
You can also follow me on Twitter.
Disclaimer: This story contains affiliate links. If you use any of the links above I can earn some change (plus you get a great resource to use)
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