Why the “Titan” Crypto Crash That Burned Mark Cuban May Not Signal a Similar Bitcoin Drop

• Last week, a cryptocurrency token dubbed Titan dropped from a price of more than $60 to a few thousandths of a cent in a matter of hours.
• Titan is a DeFi token issued to provide liquidity for a decentralized finance project, not a first-order coin like bitcoin and ether running on its own blockchain.
• While all cryptocurrencies have experienced instability recently, an extreme crash for mainstream coins is unlikely.

When a cryptocurrency token called Titan dropped from more than $60 to several thousandths of a cent in a matter of hours earlier this month, even the thickest-skinned traders were a bit alarmed.

While rapid price increases and equally rapid sell-offs are increasingly commonplace in the altcoin investing world, falling in value in one day is uncommon. Even the company behind the token itself dubbed the event the “world’s first large-scale crypto banking run.”

Self-made billionaire Mark Cuban, who was personally invested in the token, tweeted on Wednesday that he was “hit like everyone else.”

But the good news for crypto investors is that tokens like titanium are a very special category of coin, with functionality and use case radically different from a mainstream digital currency like bitcoin or ether.

Titan is part of “the wild, wild west of programmable money and fundraising,” said Scott Spiegel, co-founder of BitBasel, a Miami-based blockchain startup.

Titan is a DeFi token. DeFi is short for Decentralized Finance, which describes a variety of blockchain-based projects that cut out various intermediaries in finance. Want a Christmas Eve midnight rental? There is a DeFi app for that.

DeFi projects typically issue coins to raise funds. While crypto start-ups raised capital through initial coin offerings in 2017, today the route to cash is often via yield farming: in exchange for liquidity, investors receive tokens that can earn interest over time.

When Titan’s value peaked, some decentralized exchanges offered annual percentage returns of up to 4,151,343,175%, according to a screengrab posted on Reddit — returns that, unsurprisingly, seemed too good to be true.

So far, it appears the Titan’s crash wasn’t the result of a scam known as a “rug pull,” in which the creators drain a pool of cash and rush with the loot. The developers seem to have been serious in their quest to create a new breed of stablecoin called Iron. (Stablecoins are a type of digital token whose value is tied to a reserve asset like the US dollar. They’re attractive to investors because their value is theoretically less volatile.)

Iron is classified as an algorithmic stablecoin because it is a fully decentralized, algorithmic self-stabilizing coin whose reserve consists of 75% USDC – a blue-chip stablecoin – and 25% titanium.

However, this reliance on titanium proved problematic.

As crypto whales began shedding their titanium stake as it peaked, the price of the stablecoin, iron, and the token, titanium, surged lower in tandem. The whole situation became even more chaotic when the stablecoin’s smart contract, or underlying code, temporarily malfunctioned, making it impossible for holders to redeem their coins.

Writing solid smart contracts is a tricky business, QuickNode co-founder Auston Bunsen told CNBC. “Your code is public, most likely immutable, and available 24/7 for anyone in the world to run as they please.”

A catastrophe of epic proportions ensued.

“The iron model was deeply flawed from a tokenomics perspective,” said Mati Greenspan, portfolio manager and founder of Quantum Economics. “The code was untested and the system was never properly stress tested.”

But here’s the thing – these so-called algorithmic stablecoins are notorious for bugs. In fact, these mistakes are so common that they’re captured in memes like this one:

Cuban told CNBC the incident was also the by-product of a poorly run business.

“I think some people don’t realize that DeFi is a business like any other,” Cuban said.

“They need revenue, and that revenue needs to cover their customer and capital acquisition costs and provide reserves and processes, which Eisen has not done sufficiently to survive a significant customer loss and capital withdrawal,” he said.

Titan token sell-off is not a sign other coins are going bad, crypto experts say.

“You can’t compare a new project that’s just yield farming to another blockchain that’s already super, super structured and very old,” said Jorge Cortes, chief operating officer of UnifyIT, an organization specializing in blockchain based project development.

Part of what makes a token like Titan more prone to instability is the fact that it’s not built on its own chain.

Because cryptocurrencies like ether and bitcoin exist on their own unique blockchain, they are known as layer one currencies. Tokens launched on Layer One blockchains have properties more similar to securities as they relate to fundraising and voting rights.

“The vast majority of cryptocurrencies lead with ‘novel functionality’, such as Iron Finance’s proposal for a partially collateralized stablecoin, and neglect security, stability and user control,” said Alyse Killeen, founder and managing partner of bitcoin-focused venture firm Stillmark.

Finally, Spiegel points out that anyone, be they legitimate technologists or scammers, can launch new projects this way. He says that’s why it’s important to do your own research and due diligence before investing in DeFi tokens.

“What we’ve seen in previous cycles is that many of these impacted retail investors are learning from their experiences and shifting their focus to Bitcoin,” Killeen said.

Disclosure: CNBC owns the exclusive off-network cable rights to Shark Tank, which features Mark Cuban as a panelist.

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