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As DeFi partners clash over $32m in bad debt, depositors could lose everything

As DeFi partners clash over $32m in bad debt, depositors could lose everything
Alpha Venture DAO co-founder and CEO Tascha Punyaneramitdee

In a rare clash between DeFi partners, lending protocol Iron Bank has cut off the lending accounts of its long-time partner Alpha Homora over its failure to settle almost $32 million of bad debt, Iron Bank said in a Thursday tweet.

Iron Bank altered code in its smart contracts so that Alpha Homora cannot withdraw assets deposited into the bank. In its statement, the protocol said it “paused Alpha Homora’s lending accounts” to protect depositors.

But Alpha Homura, a protocol managed by the Alpha Venture DAO that lets users earn yield on their crypto, says it was blindsided by the change. Now those with assets deposited into Iron Bank through Alpha Homora could lose them if the two protocols cannot reach an agreement.

“Whatever concerns Iron Bank [...] does not entitle it to take user deposits,” Tascha Punyaneramitdee, co-founder and CEO of Alpha Venture DAO, said in an open letter to Iron Bank.

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“This is a reminder to all other protocols that integrate with Iron Bank to be very mindful and careful, as their action has shown that they are willing to unethically misappropriate users’ funds,” she said.

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Iron Bank is a DeFi lending protocol that specialises in protocol-to-protocol lending. This means that other protocols can integrate Iron Bank’s smart contracts letting their users automatically borrow assets from the protocol. Several prominent protocols use Iron Bank, including Keep3r Network and Yearn Finance.

Iron Bank currently has $29.8 million of deposits – or “total value locked” – in its smart contracts, less than Alpha Homora’s total outstanding debt.

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In a series of Twitter posts, Iron Bank said it had “repeatedly asked” Alpha Homora for a solution to paying off its debt but that it “failed to provide” one.

“Alpha Homora needs to take ownership for the cost of their own exploit,” Iron Bank said.

The spat between Iron Bank and Alpha Homora dates back to February 2021, when a hacker exploited Alpha Homora. An oversight in Alpha Homora’s code let the hacker steal over $37 million worth of cryptocurrencies from Iron Bank. Alpha Homora agreed to divert 20% of its future protocol fees to reimburse the bank and post 50 million of Alpha Venture DAO’s ALPHA token as collateral, worth approximately $109 million at the time of the hack.

Total value locked in the Iron Bank protocol

But due to the ongoing crypto winter, the value of Alpha Homora’s ALPHA token collateral dropped sharply. The collateral is now worth just $6 million, making Alpha Homora’s debt to Iron Bank undercollateralized.

The fall in crypto activity also affects Alpha Homora’s ability to pay off the debt. According to Discord posts by IronBank Mod, Alpha Homora is only paying an average of $5,000 a month on more than $31 million worth of debt.

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