Iron Bank and Alpha Homora Conflict Summarized
Overview of What Happened
On March 1, 2023, Iron Bank (IB), an integrating partner of Alpha Homora (AH), unilaterally changed the smart contract configuration, preventing lenders on AH from withdrawing their liquidity.
This was due to the unresolved debt between the two protocols, AH and IB, that has existed since the code exploit attack in 2021. Despite AH's commitment to adhering to an agreed-upon plan to repay the debt, IB failed to liquidate collateral when required, resulting in a hole in their protocol. As a result, IB upgraded their code to freeze depositors’ funds without AH’s knowledge and demanded for a resolution.
AH, on behalf of depositors, has negotiated and proposed multiple solutions to IB to unfreeze the frozen funds for over 2.5 months. Despite many attempts, IB rejected all proposed solutions and continued to freeze funds. As a result, depositors have all agreed and voted to stop negotiating with IB, receive goodwill funds from AH, and pursue legal action against IB to unfreeze their funds.
Event Breakdown
Since 2021 Until Iron Bank Froze Depositors’ Funds
Since 2021, there exists bad debt between Alpha Homora protocol (AH) and Iron Bank (IB).
- The bad debt occurred because of the code exploit attack and not because of the protocol design though AH took security as the top priority and conducted 3 external audits by top-tier security audit firms.
- AH and IB work through protocol-to-protocol lending mechanism, and thus it was appropriate for the issue to be resolved between the two protocols.
Both protocols agreed to use 20% of AH’s protocol fees to pay back the bad debt and provide 2x collateral with ALPHA tokens. Per the agreement, this collateral can be sold to settle the bad debt in the event that the collateral value drops below 1.66x and no new collateral is provided.
- Agreement can be found here
This had been the default way of resolution, and AH had been honoring the agreement.
IB failed to liquidate the collateral when it dropped below 1.66x, leading to the current hole in the Iron Bank protocol.
IB made a code change to freeze depositors’ funds without AH’s and the community’s knowledge, revealing itself to have centralized control over the network, and demanded for accelerated payments from AH despite having the original agreement in place.
- Code change can be found here.
After Iron Bank Froze Depositors’ Funds
Depositors and AH, on behalf of depositors, negotiated with IB and exhausted different solutions for IB to return depositors funds over 2.5 months.
Depositors voted to agree upon multiple solutions for IB to return depositors’ funds and proposed those to IB.
- Some of these proposals can be found here and here.
- Other negotiations can also be found in the 10 open letters that AH published and other Twitter exchanges between AH and IB in addition to negotiations held privately.
Despite multiple solutions proposed, IB did not agree to any and continued to freeze depositors’ funds.
- If IB wanted accelerated payments instead of honoring the original agreement to settle the debt
- Then IB should agree to one of the solutions proposed.
- However, IB did not agree to any of the solutions. - If IB chose to sell the collateral, which is a collateral for the whole position
- Then the debt between the two protocols is settled and IB should also return depositors’ funds.
- However, IB did not agree to this. - If IB did not choose anything
- Then IB should return depositors’ funds and continue to honor the original protocol-to-protocol agreement or discuss with AH to come to a new solution between two protocols.
- However, IB did not agree to this.
Depositors now voted to stop negotiating with IB, receive goodwill funds set up by AH, and take appropriate legal action against IB to unfreeze depositors’ funds.