How Ichi Tokens Plunged 90% After Bad Debt Fiasco on Rari

Ichi’s ICHI governance tokens have plunged some 90% in the past 24 hours after a series of cascading liquidations in its pool on yield-generating platform Rari, data shows.

“The Ichi Fuse Pool (#136) is currently experiencing bad debt due to cascading liquidations,” Rari said in a tweet late Monday. “This is a permissionless pool that is owned and operated by Ichi Foundation.”

The slump occurred as Rari's Fuse protocol automatically sold holdings in Pool 136 to support the pool's value. However, low liquidity for the token on decentralized exchanges (DEX) meant the price suddenly plunged, and the pool was drained. At the time of writing, the liquidity sits at $0 as the entire pool was wiped out as crypto prices declined Monday.

Rari allows users to supply and borrow any asset in its Fuse pools to earn yields on their idle capital. Users can set up their own pools with a basket of Ethereum-based assets. Other users can deposit funds into those pools to earn yields. The yields are generated as rewards for trading activity on those liquidity pools.

Ichi allows crypto communities to mint stablecoins by backing each created token with $1 in value. For example, the oneBTC token created on Ichi was initially backed by equal amounts of USD coin (USDC), a stablecoin pegged to U.S. dollars, and wrapped bitcoin (WBTC), with the WBTC share increasing as the underlying bitcoin (BTC) treasury grew in size.

Pool 136 on Rari consisted of such Ichi-issued assets. Data show some $124 million – spread over WBTC, oneBTC, ICHI and six other assets – was locked on the Fuse protocol.

Ichi, which set up Pool 136, set a collateral factor of 85% on ICHI and allowed hundreds of millions of dollars to be used as collateral. The collateral factor refers to the maximum amount of money that can be borrowed against supplied assets. That meant users supplying 100 ICHI as collateral could borrow at most 85 ICHI worth of other assets at any given time.

"Liquidity was structured so the bulk of it sat just under market price, allowing the pool to absorb sells with minimal impact," explained Aswath Balakrishnan, vice president of research at Delphi Digital, in a Telegram message. "There wasn't enough liquidity to absorb all the ICHI liquidations, causing the price to cascade."

Rari developers pointed out the high collateral factor and lack of caps on supply contributed to the slide.

“A collateral factor of 85% is extremely high,” Rari developer Jack Longarzo wrote in a tweet. “Additionally, the team didn't use supply caps and allowed an infinite amount of $ICHI to be used as collateral. This allowed $ICHI holders to borrow extensively against uncapped collateral.”

“if you see collateral in a pool significantly in excess of what can be liquidated this is a red flag. Cascading liquidations can cause the price to decline quickly, dry up the liquidity, and leave the pool with bad debt,” he added.

ICHI traded at over $120 on Monday in early European hours. Data from CoinGecko show pool liquidations started around 12:30 UTC on Monday and continued until 2:30 UTC on Tuesday.

Prices dropped all the way to $12.50 and have since stabilized. Market capitalization reached $53 million at writing time from Monday’s $579 million.

Longarzo said Ichi developers could have taken several steps to cushion risks, such as increasing the liquidity in the market for ICHI when the drop began and putting a supply cap in place when the pool was created.

Ultimately, it was up to Ichi’s developers to ensure risks related to Pool 136 were contained.

“Fuse is a permissionless protocol. Pool operators are responsible for following best practices to avoid situations like this one,” Longarzo said.