Why the crash of crypto token titan that burned Mark Cuban may not foretell a bitcoin plunge.
Even the most hardened traders were worried when the price of a cryptocurrency token called titan plummeted from more nearly $60 to a few thousandths of a cent in the span of a few hrs earlier this month.
While quick price appreciation and similarly rapid sell-offs are becoming more common in the altcoin sector, a value zeroing out in a single day is exceptional. The event was dubbed the world's "first large-scale crypto bank run" by the company behind the coin.
Mark Cuban, a self-made billionaire investor who was personally involved in the coin, said he "was hammered like everyone else" on Twitter on Wednesday.
The good news for crypto investors is that tokens like titan belong to a separate category of coin, with functions and applications that are fundamentally different from those of conventional digital currencies like bitcoin or ether.
Titan is a participant in "the Wild, Wild West of programmable money and fundraising", according to Scott Spiegel, co-founder of BitBasel, a blockchain start-up based in Miami.
Dropping to $0
Titan is a DeFi cryptocurrency. Decentralized finance, or DeFi, refers to a number of blockchain-based projects that eliminate various financial middlemen. Do you need a loan at 12 a.m. on Christmas Eve? For that, there's a DeFi app.
To raise funds, DeFi projects frequently produce coins. Whereas in 2017, crypto startups collected money through initial coin offers (ICOs), today's path to cash is more likely to use yield farming, in which investors are given tokens that might earn interest over time in exchange for liquidity.
As titan’s value peaked, some decentralized exchanges were offering annual percentage yields of as much as 4,151,345,178%, , according to a screenshot posted to Reddit - Returns that were, understandably
So far, it doesn't appear that the titan fall was caused by a "rug pull," in which designers drain a pool of wealth and make haste with the proceeds. Iron developers appear to have been sincere in their desire to create a new type of stablecoin. (Stablecoins are digital tokens whose value is tied to a reserve asset, such as the US dollar.) They appeal to investors since their value is less volatile in theory.)
Iron is categorised as an algorithmic stablecoin since it is a fully decentralised, algorithmically self-stabilizing coin with a reserve made up of 75% USDC (a blue-chip stablecoin) and 25% titan.
Titan's reliance, on the other hand, became troublesome.
When crypto whales began selling their titan holdings as the price reached its apex, the price of the stablecoin, iron, and the token, titan, both plummeted. The scenario became much more complicated when the stablecoin's smart contract, or underlying code, malfunctioned, making it difficult for holders to redeem their coins.
QuickNode co-founder Auston Bunsen told CNBC that writing rock-solid smart contracts is challenging. “Your code is public, most likely immutable, and accessible to anyone in the globe at any time, 24 hours a day, seven days a week.”
It resulted in a catastrophe of epic proportions.
“From a tokenomics standpoint, the iron model was severely flawed,” said Mati Greenspan, portfolio manager and founder of Quantum Economics. “The system was never audited, and the code was never thoroughly stress-tested.”
The problem is that these so-called algorithmic stablecoins are renowned for failing. In fact, these failures are so common that memes like this one have been created to commemorate them:
Cuban told, the incident was partly the result of a poorly operated firm.
"I believe some people fail to recognise that DeFi is a business like any other", Cuban stated.
“They must generate revenues, and those revenues must cover their customer and capital acquisition costs, as well as provide reserves and processes, which iron did not do well enough to survive a significant loss of customers and capital,” he explained.
Titan vs. Bitcoin
Crypto experts say the massive token sell-off isn't a sign of things to come for other currency.
“You can't compare a fresh project that's just yield farming with another blockchain that's already super, extremely structured, and very old,” said Jorge Cortes, chief operating officer of UnifyIT, a blockchain-based project development firm.
The fact that a token like titan isn't built on its own chain makes it more subject to volatility.
Layer one currencies, such as ether and bitcoin, are referred to as such since they each have their own blockchain. In terms of fundraising and voting rights, tokens launched on top of layer one blockchains are more akin to securities.
“The great majority of cryptocurrencies start with a ‘novel functionality," such as Iron Finance's proposal for a partially collateralized stablecoin, which prioritises security, stability, and user control over security, stability, and user control,” said Alyse Killeen, founder and managing partner of bitcoin-focused venture firm Stillmark.
Finally, Spiegel points out that anyone, whether respectable technologists or crooks, can use this method to start new enterprises. That's why, he explains, doing your own research and due diligence before investing in DeFi coins is critical.
“In previous cycles, we've seen many of these impacted retail investors learn from their mistakes and redirect their focus to bitcoin,” Killeen added.
Finally, Spiegel points out that anyone, whether respectable technologists or crooks, can use this method to start new enterprises. That's why, he explains, doing your own research and due diligence before investing in DeFi coins is critical.
“In previous cycles, we've seen many of these impacted retail investors learn from their mistakes and redirect their focus to bitcoin,” Killeen added.
