Alpha Homora appears to have provided Iron Bank with $32 million in customer funds to service bad debts incurred in February 2021.
On March 2, Iron Bank, a fork of the controversial CREAM lending protocol, abruptly paused the v2 contracts of leveraged yield farming protocol Alpha Homora after talks between the two protocols soured.
On Wednesday, Iron Bank suddenly lifted the pause on Alpha Homora v2 on the Optimism, Avalanche and Fantom blockchains, allowing Alpha users to withdraw their assets for the first time in almost a week. However, $41 million worth of alpha user assets remain tied to Iron Bank’s Ethereum launch.
On Thursday, Alpha Homora proposed that Iron Bank retain nearly $32 million in Alpha user funds to pay off the debt and return about $8.7 million in excess of the debt to its users. Alpha has also asked Iron Bank to return the 63 million ALPHA tokens it provided as collateral.
“We will work with Alpha depositors to clear the amount of bad debts and make depositors whole as much as possible,” Alpha Homora said. “This means that the bad debts will be transferred from one between the two protocols to one between Alpha Homora and its depositors.”
Alpha also urged its users to withdraw their assets to minimize risk. According to DeFi Llama, Alpha Homora's total value lock (TVL) fell to $59 million from $68.3 million on Wednesday. Iron Bank's TVL is $21.2 million.
Alpha Homora and Iron Bank work together through a “protocol-to-protocol lending mechanism.”
Taking advantage of debts
After Alpha suffered $32 million in bad debt from a malicious exploit in February 2021, the two protocols agreed that the debt would be paid off over time at 20% of Alpha Homora's protocol fees. Alpha Homora also provided Iron Bank with 50 million ALPHA tokens as collateral.
On February 14, Iron Bank asked Alpha to provide a solution to address debt undercollateralization due to the loss of value of the pledged ALPHA tokens. Alpha said they reached out to Iron Bank on March 1 with a proposed solution and tried to arrange a meeting to discuss the details, but received no response.
But tensions between the two protocols reached a peak last week after Iron Bank paused Alpha Homora's credit accounts on March 2.
“Iron Bank]ignored the message and [made] “A code change that appears to have been made unilaterally and without notice, now preventing lenders from withdrawing their liquidity,” Alpha Homora said in an open letter on March 2. “Whatever concerns Iron Bank has do not authorize it to accept user deposits.”
On Discord, Iron Bank said that Alpha's monthly repayments have dropped to just $5,000 over the past three months. It also said the loan was now under-collateralized as ALPHA's value fell amid the bear market, although collateral had previously been increased to ALPHA's 63 million.
Iron Bank responded with its own open letter on Twitter, claiming that Alpha Homora had ignored its calls for the protocol to provide additional collateral. It also noted that Alpha had only repaid $481,746 of its $32.4 million debt in 25 months.
According to Iron Bank, liquidity for ALPHA on exchanges is also decreasing, creating additional risks for its use as collateral. Iron Bank demanded that Alpha repay its debts in full by March 6 and promised to stop pausing the accounts in the event of repayment. “Otherwise, Iron Bank will pay off Alpha Homora’s exploitation debts,” it warned at the time.
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