Overview of What Happened
As a recap, AH and IB (Iron Bank) had bad debt between two protocols as a result of code exploit attack in 2021. The debt was resolved between 2 protocols with debt repayment plan together with collateral that AH put up worth 2x the bad debt amount. This is outlined in the agreement that both AH and IB agreed to here.
IB is a lending protocol that promoted themselves as a lending platform for other DeFi protocols to integrate and tap into this liquidity hub. As a lending platform for other protocols, IB needed to make sure they remain solvent. However, IB failed to liquidate AH's collateral when needed, resulting in a hole in IB.
Instead of finding other solutions to fill the hole as a result of their action to not liquidate collateral in-time, IB unilaterally changed the smart contract configuration to prevent lenders on AH from withdrawing their liquidity, without AH's knowledge.
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.
Since 2021 Until Iron Bank Froze Depositors’ Funds
Since 2021, there exists bad debt between AH and 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 IB 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 the fact that IB failed to liquidate the collateral, which was 1.66x the bad debt, when needed.
- 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 any other payments, even though they failed to liquidate the collateral themselves
- 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 on-chain and IB should also return depositors’ funds.
- 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.