IRON Peg Analysis — Market crash on 19 May 2021
The month of May has been a tumultuous one for crypto markets, as bearish sentiment has taken over and sent the price of Bitcoin and alts crashing. The most painful portion of this crash occurred on May 19, sending the price of Bitcoin from ~$43k to ~$30k in a matter of hours as the market capitulated. Throughout this flash crash, many stablecoins struggled to keep the peg, as many of the stabilizing algorithms could not keep up with the falling tide. In this article, we’re going to analyze the IRON peg and compare it to some of its alternatives.
Bitcoin crash on 19 May 2021
If you look at the CoinGecko price history, it would appear that the IRON price fell to about $.84 during the worst of the crash — however, this data is not accurate. Zooming in on a specific day in question, you can see that CoinGecko has zero volume recorded during that time period. This is because CoinGecko’s own servers and data feeds were lapsing due to the surge of demand.
To get a clearer picture of how the peg performed during the Bitcoin crash, we can look at Iron’s chart on our website. It shows that even on May 19, the IRON peg never truly deviated from the peg by more than a few thousandths of a cent.
All stablecoins — even the most capital efficient ones — fluctuate around peg to some extent. For IRON’s peg to only be off by less than 0.5% for a moment means that the protocol actually performed remarkably well!
As an example, UST — an algorithmic stablecoin on the Terra blockchain — struggled deeply and for a very prolonged period of time during this downtrend. See the below chart of its price history:
As you can see, UST began to lose its peg on May 19, and its failure to regain peg quickly led to a bank run, with the price of UST falling to a low of $.919 a few days later. UST remained under peg for over a week, until it was finally recaptured on May 26.
Un-Tethered
As the name implies, Tether — or, USDT — is supposed to remain “tethered” to the US Dollar. Its whole purpose as a token is to exist as a safe hedge on exchanges for traders to park their funds, and represent the true fiat value of their portfolio. However on May 19, Tether experienced a sharp decline from its pegged value, falling as low as 87 cents:
While Tether claims to be backed 1:1 with true USD held in a vault, a severe lack of transparency has led to controversy and legal trouble for Tether. In the latest story between Tether and the New York Attorney General, Tether detailed its currency reserves for the first time — revealing that nearly half of the Tether supply is backed by “commercial paper” — another word for corporate bonds. It is unclear the specific issuance and quality of the bonds. Let’s move on.
Capital Efficiency
Unlike purely algorithmic, “seigniorage” stablecoins like UST and others, IRON’s protocol utilizes a “fractionalized” hybrid approach of algorithm and collateral. This hybrid still allows the value-capture benefits of seigniorage, while simultaneously retaining the strong peg performance. Check out our article that goes further in-depth on this topic by clicking here.
Stress Testing — Conclusion
Market shocks provide the best stress tests for stablecoin pegs, and IRON’s strong peg retention should go a long way to grow trust in our community. IRON has shown itself to be a shock-proof stablecoin, and the stabilizing protocol is now battle-hardened. Thanks for reading!
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