The ins and outs of the Iron Bank "tear apart" Alpha Homora incident
How should the over $30 million bad debt between Iron Bank and Alpha Homora be handled?Written by: Azuma, ODAILYPlanet Daily
Recently, the dispute between Iron Bank and Alpha Homora over more than $30 million in bad debts has sparked widespread discussion in the DeFi community.
Iron Bank is the successor to Cream v2, a lending market jointly launched by Cream Finance and Yearn Finance that supports partial collateralization (or even no collateral), while Alpha Homora is a leveraged protocol aimed at providing yield farming efficiency. In early 2021, Alpha Homora launched version 2, beginning to utilize the liquidity of Cream v2 to provide leveraged services to users.
In short, the relationship between the two parties is: Cream v2 serves as the underlying lending market providing the liquidity needed for leveraged operations for users of Alpha Homora v2, while Alpha Homora v2, as an upper-layer application, provides users with access to Cream v2 through its own frontend and increases the interest rates for depositors of Cream v2 by amplifying borrowing demand.
The conflict between the two can be traced back to a hacking incident in early 2021. At that time, hackers exploited a vulnerability in Alpha Homora's code to borrow funds from Cream v2 and conducted a flash loan attack, resulting in a loss of $37.5 million.
After the incident, both parties agreed to classify a portion of the unrecovered losses as Alpha Homora's debt to Cream v2, with Alpha Homora required to pay back 20% of the protocol's revenue monthly, while also needing to provide sufficient collateral to secure the repayment ------ specifically, locking 50 million ALPHA (approximately $60 million at the time) in a custodial contract controlled by Cream v2.
According to recent disclosures from the now-renamed Iron Bank, the details of Alpha Homora's debt to Iron Bank at the time of the theft were 11,245 ETH + 4,263,139 DAI + 4,032,014 USDC + 5,647,242 USDT, totaling $32.429 million; as of March 2, 2023, the debt details were 11,422 ETH + 3,106,549 DAI + 3,851,025 USDC + 6,212,087 USDT, totaling $31.947 million.
If everything goes smoothly, Alpha Homora may gradually repay its debt to Iron Bank, but due to the bear market, Alpha Homora's business data has seen a severe decline, and the ALPHA token itself has also dropped significantly. The current situation is that Alpha Homora can only repay $5,000 per month through protocol revenue, while the collateral asset that was originally worth $60 million has now fallen to nearly $6 million.
The slowdown in repayment progress and the gap in collateral have raised Iron Bank's concerns about whether this debt can be successfully recovered. On March 2, Iron Bank issued an open letter to Alpha Homora, stating that the protocol had requested Alpha Homora to supplement collateral on February 14, and Alpha Homora had also proposed a solution within three days, but two weeks later, there had still been no action. To ensure its own and other related protocols' safety, Iron Bank suspended the lending functions of accounts related to Alpha Homora on March 1, ------ as mentioned earlier, Alpha Homora provided users access to Cream v2 through its frontend, which meant these users could no longer withdraw their funds deposited in Iron Bank.
Iron Bank also emphasized in a tweet that if Alpha Homora does not supplement collateral by March 5, it reserves the right to use the funds in those accounts to offset the debt.
After Iron Bank played its "trump card," Alpha Homora, facing a crisis with user funds, finally could not sit still. Since March 2, the Alpha Homora team has sent three open letters to Iron Bank in response to the incident.
First open letter: https://blog.alphaventuredao.io/an-open-letter-to-iron-bank/
Second open letter: https://blog.alphaventuredao.io/second-open-letter-to-iron-bank/
Third open letter: https://blog.alphaventuredao.io/third-open-letter-to-iron-bank/
In the first open letter, Alpha Homora explained that it was not sitting idly by, but that more time was needed to submit a solution. The Alpha Homora team had requested a meeting with Iron Bank to discuss, but was ignored by the other party. At the same time, Alpha Homora emphasized that regardless of Iron Bank's concerns, it has no right to freeze user funds, and called for Iron Bank to immediately release user funds and return to normal discussions.
In the second open letter, Alpha Homora again demanded that Iron Bank release user funds, stating that if Iron Bank does not do so, it will no longer fulfill the repayment obligations agreed upon in 2021 and will not supplement collateral. Additionally, Alpha Homora "threatened" to consider legal action until the true identity of someone in Iron Bank's anonymous team is revealed. Alpha Homora also mentioned that in extreme situations, it would bear the losses of user funds.
In the third open letter, Alpha Homora once again demanded that Iron Bank release user funds, and accused Iron Bank of being a centralized platform that arbitrarily changes protocol rules. This time, Alpha Homora finally proposed a preliminary suggestion, which is as follows:
Iron Bank should return customer funds from chains other than Ethereum;
Of the approximately $41 million on the Ethereum chain, Iron Bank should return $11 million;
As for the remaining approximately $30 million, Alpha Homora will share detailed information on how to handle it with the community within a week after Iron Bank agrees to the above solution.
In short, this preliminary suggestion is "you return the excess first, and then we can discuss what to do with the rest."
As of the publication of this article, Iron Bank has not responded to Alpha Homora's suggestions through official channels, but the unresolved situation has already had adverse effects on both parties.
On social media, Iron Bank's action of freezing user funds has faced widespread criticism, with many Twitter users accusing it of being akin to a crime; on the Alpha Homora side, some Twitter users have discovered that perhaps due to the impact on fund balance, some positions that should have been liquidated within the platform have not been effectively liquidated, potentially threatening the security of the protocol.
This morning, Alpha Homora tweeted: "We have been negotiating with Iron Bank to urge it to release user funds. The discussions are close to a solution, and details are being formulated. Please be patient, Alpha Homora will never allow Iron Bank to take user funds."
As of now, this is the entire story. As for how it will develop in the future, please stay tuned.
