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

The collapse of Terra’s ecosystem — particularly, native coin LUNA and algorithmic stablecoin TerraUSD (UST) — rocked the broader blockchain and cryptocurrency ecosystem. Not solely did Terra-ecosystem tokens (equivalent to Anchor’s ANC) collapse in worth, however the widespread worry, 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 occurred? Terra debacle exposes flaws plaguing the crypto business

An enormous blow to business confidence

Crypto market members — and particularly these concerned with LUNA and UST — have been worn 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 loss of life spiral was completely brutal. Not simply hedge funds, however common people misplaced some huge cash. In some instances, they misplaced their life financial savings.

Sadly, most common customers (and even among 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.

Regulators took the bait

Regulators have been fast — nearly 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 Providers 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 one can 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 huge, crypto) as an business run by “shadowy tremendous coders” and criminals. The lawmaker additionally just lately wrote with Senator Tina Smith that “investing in cryptocurrencies is a dangerous and speculative gamble,” amongst different issues. Studying between the traces, Terra’s collapse is throwing gas on Congressional crypto critics’ fires.

The image being painted by some lawmakers — and positively not simply by these within the U.S. — is that the crypto business is a harmful place for individuals to speculate their cash. They usually cite a scarcity of laws, person protections and risk-mitigation techniques (when not busy falsely stating its primarily utilized by criminals).

Nevertheless, this portray isn’t precisely a sensible one.

The position of CEXs within the danger administration and person safety

The outdated “Wild West” days of the cryptocurrency business are long-gone — at the very least, within the centralized change (CEX) house. Many superior buying and selling platforms with centralized order books do, in reality, present security nets and risk-mitigation measures with the only 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 therefore many crypto traders and merchants — OKX stood out as cryptocurrency change that was capable of shield its clients from the brutal results of the meltdown.

I’ll clarify how that labored — OKX’s risk-management system completed this by first noticing the value volatility of LUNA and sending an electronic mail alert to all traders who have been staking UST on OKX Earn, the change’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 worth 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: Threat administration in crypto: Aka ‘the artwork of not dropping all of your cash’

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 didn’t keep its peg to the greenback.

Why danger administration issues in crypto

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

In fact, there should be a stability between the founding values of crypto — independence, decentralization, freedom, “trustless” safety — and danger mitigation for individuals and corporations 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 impartial entry to the ever-growing world of crypto. Nevertheless, not everybody is prepared (and even desires) to tackle all of the dangers themselves.

Centralized exchanges nonetheless have a serious position to play in facilitating safer entry to decentralized finance by way of superior risk-mitigation techniques. As an increasing number of new individuals enter the thrilling world supplied by blockchain expertise, we will present steerage, experience and risk-mitigations to assist be certain 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 entails danger, and readers ought to conduct their very own analysis when making a choice.

The views, ideas and opinions expressed listed below are the creator’s alone and don’t essentially mirror or symbolize 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 Providers Group. With 15 years of expertise within the worlds of monetary companies and fintech, Lennix performs a key position in OKX’s transformation from a normal centralized change into the most important hub for DeFi companies, nonfungible tokens and blockchain gaming — in addition to crypto buying and selling.