Terra’s meltdown highlights benefits of CEX risk-management systems


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The collapse of Terra’s ecosystem — specifically, native coin LUNA and algorithmic stablecoin TerraUSD (UST) — rocked the broader blockchain and cryptocurrency ecosystem. Not solely did Terra-ecosystem tokens (akin to Anchor’s ANC) collapse in worth, however the widespread concern, uncertainty and doubt despatched market-leading cryptocurrencies Bitcoin (BTC) and Ether (ETH) beneath $27,000 and $1,800, respectively, on some exchanges.

As of the time that I’m writing this text, the cryptocurrency market nonetheless hasn’t recovered — even when Terra’s contagion has been principally contained.

Associated: What happened? Terra debacle exposes flaws plaguing the crypto industry

An enormous blow to trade confidence

Crypto market contributors — and particularly these concerned with LUNA and UST — have been wiped out within the collapse of the 2 belongings. For individuals who have been staking the supposedly secure “stablecoin” tenuously pegged to the greenback to earn curiosity, the UST dying spiral was completely brutal. Not simply hedge funds, however common people misplaced some huge cash. In some circumstances, they misplaced their life financial savings.

Sadly, most common customers (and even a number of the hedge funds) have been unaware of the dangers concerned with staking algorithmic stablecoins, regardless of a historical past of experimental failures on the algo-stable entrance and no profitable implementations.

Terra’s meltdown highlights benefits of CEX risk-management systems

Regulators took the bait

Regulators have been fast — virtually too fast — to make use of Terra’s dramatic unwinding for example of why stablecoin (and decentralized finance) regulation is required. United States Treasury Secretary Janet Yellen was fast to say the occasion in a Congressional listening to of the Home Monetary Companies Committee on the Monetary Stability Oversight Council’s Annual Report back to Congress, the place she requested lawmakers develop a “constant federal framework” on stablecoins in an effort to handle dangers.

Associated: DeFi: Who, what and how to regulate in a borderless, code-governed world?

Yellen’s feedback are comparatively tame when in comparison with Senator Elizabeth Warren’s, who has repeatedly lambasted decentralized finance (and, by and enormous, crypto) as an trade run by “shadowy tremendous coders” and criminals. The lawmaker additionally recently wrote with Senator Tina Smith that “investing in cryptocurrencies is a dangerous and speculative gamble,” amongst different issues. Studying between the strains, Terra’s collapse is throwing gasoline on Congressional crypto critics’ fires.

The image being painted by some lawmakers — and definitely not simply by these within the U.S. — is that the crypto trade is a harmful place for folks to speculate their cash. They usually cite an absence of rules, consumer protections and risk-mitigation techniques (when not busy falsely stating its primarily utilized by criminals).

Nonetheless, this portray isn’t precisely a practical one.

The position of CEXs within the threat administration and consumer safety

The previous “Wild West” days of the cryptocurrency trade are long-gone — not less than, within the centralized alternate (CEX) area. Many superior buying and selling platforms with centralized order books do, in reality, present security nets and risk-mitigation measures with the only real objective of defending their customers from extreme market volatility.

For instance, within the wake of the crypto market collapse round LUNA and UST final week — which was devastating for thus many crypto traders and merchants — OKX stood out as cryptocurrency alternate that was in a position to defend its prospects from the brutal results of the meltdown.

Terra’s meltdown highlights benefits of CEX risk-management systems

I’ll clarify how that labored — OKX’s risk-management system completed this by first noticing the worth volatility of LUNA and sending an electronic mail alert to all traders who have been staking UST on OKX Earn, the alternate’s crypto-earning aggregator platform that features DeFi incomes choices. Over two phases, OKX launched over 500 million UST belonging to over 9,000 traders. The value of UST throughout these two phases was $0.99 and $0.8. OKX additionally notified Earn customers that their UST had been launched from staking.

Associated: Risk management in crypto: Aka ‘the art of not losing all your money’

Releasing/unlocking traders’ UST from being staked by way of OKX Earn gave traders an opportunity to keep away from additional loss on their UST, which did not keep its peg to the greenback.

Why threat administration issues in crypto

The Terra collapse and wider results on the cryptocurrency market show why crypto exchanges want superior threat administration techniques — particularly when offering entry to decentralized finance (DeFi) protocols providing favorable yields. The response of OKX’s threat administration system, which gave merchants an opportunity to be protected by the consequences triggered by the extreme volatility within the markets, highlights the advantages of utilizing a centralized alternate platform for “doing DeFi.” As a substitute of “going it alone,” so to talk, and staking on Anchor or different protocols, using a CEX’s choices could provide consumer safety and threat mitigation if and when issues go incorrect for the protocol in query.

After all, there should be a stability between the founding values of crypto — independence, decentralization, freedom, “trustless” safety — and threat mitigation for folks and firms who wish to spend money on, earn or commerce crypto. On the finish of the day, all of us need everybody to have secure and unbiased entry to the ever-growing world of crypto. Nonetheless, not everybody is prepared (and even needs) to tackle all of the dangers themselves.

Centralized exchanges nonetheless have a serious position to play in facilitating safer entry to decentralized finance via superior risk-mitigation techniques. As increasingly new folks enter the thrilling world provided by blockchain know-how, we will present steerage, experience and risk-mitigations to assist be sure that — on the finish of the day — they stick round.

This text doesn’t comprise funding recommendation or suggestions. Each funding and buying and selling transfer includes threat, and readers ought to conduct their very own analysis when making a choice.

The views, ideas and opinions expressed listed here are the creator’s alone and don’t essentially replicate or characterize the views and opinions of Cointelegraph.

Lennix Lai is the managing director of OKX. He leads the enterprise technique and operations for OKX, internationally. Earlier than becoming a member of OKX, Lennix served at JP Morgan, AIG and Money Monetary Companies Group. With 15 years of expertise within the worlds of monetary providers and fintech, Lennix performs a key position in OKX’s transformation from a normal centralized alternate into the most important hub for DeFi providers, nonfungible tokens and blockchain gaming — in addition to crypto buying and selling.