The meltdown of IRON

Kudos to “Irony Holder” for a great title to an equally interesting post exploring what went wrong with the IRON stablecoin. My last post “A bank run in CryptoLand” flagged a short summary of the demise of IRON in Matt Levine’s Money Stuff column in Bloomberg and Matt’s latest column put me onto Irony Holder for a more detailed account of what went wrong. I suspect that I will be returning to the stablecoin topic many times before I am done.

One of the challenges in banking and finance is figuring our what is “new and useful” versus what is simply a “new way of repeating past mistakes” and stablecoins offer a rich palette for exploring this question. I remain open to the possibility that stablecoins will produce something more than a useful tool for managing trading in cryptoassets. The potential to make low value international payments cheaper and faster seems like one of the obvious places where the existing financial system could be improved on.

However, it seems equally likely that stablecoin innovation will repeat mistakes of the past so these post mortems are always useful. I recommend reading Irony Holder’s account in full (especially for the code error in the smart contract) but this is what I took away:

  • Part of the problem with IRON seems to be that the developers prioritised “efficiency”. In my experience the pursuit of efficiency has an unfortunate tendency to result in systems that are neither robust nor resilient – two highly desirable qualities in anything that facilitates the transfer of value. That observation (“efficient is rarely if ever resilient”) is of course based on the hard lesson that the conventional financial system learned from way it operated in the lead up to the Global Finance Crisis.
  • Algorithmic stablecoins like IRON appear to down play, or avoid completely, the need for high quality collateral. Experience in the conventional financial system suggests that collateral (ideally lots of it) is a feature of robust and resilient payment systems.
  • Yield farming around the IRON-USDC pair was producing extraordinary returns. High returns are a feature of the crypto asset world but maybe high returns on a stablecoin should have been a red flag?

I have over four decades of experience in the conventional financial system but I am a “noob” in this space (crypto-DeFi-digital) so the observations above should be read with that caveat in mind. It also important to remember that the issues above do not necessarily extend to other types of stablecoin. My understanding is that the algorithmic approach has not achieved as much traction as fiat and crypto collateralised approaches.

Hopefully you find the links (and summary) useful but also tell me what I am missing.

Tony – From the Outside

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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