Digital money creation and algorithmic stablecoin run

Abstract

This study examines the downfall of Iron Finance's algorithmic stablecoin in June 2021 and draws parallels with the Terra–Luna (UST) collapse in May 2022. Using transaction-level blockchain data, we dissect the events leading to Iron Finance's failure, unveiling algorithmic stablecoins’ inherent vulnerabilities. We highlight the disproportionate impact on retail investors, a pattern also mirrored in UST, where confidence erosion led to a similar destabilizing ‘bank run.’ Our analysis contributes to the broader understanding of the fragility of DeFi ecosystems and sheds light on the risks of adopting permissionless blockchains and algorithmic stablecoins as payment infrastructures and forms of digital money.