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


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 (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.

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

An enormous blow to trade confidence

Crypto market individuals — and particularly these concerned with LUNA and UST — have been wiped out within the collapse of the 2 property. For individuals who have been staking the supposedly protected “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 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 — 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 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 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 huge, 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 positively not simply by these within the U.S. — is that the crypto trade is a harmful place for folks to speculate their cash. They typically cite a scarcity of laws, 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 function of CEXs within the danger administration and consumer safety

The outdated “Wild West” days of the cryptocurrency trade are long-gone — at the very least, 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 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 buyers and merchants — OKX stood out as cryptocurrency alternate that was capable of defend its clients from the brutal results of the meltdown.

I’ll clarify how that labored — OKX’s risk-management system achieved this by first noticing the worth volatility of LUNA and sending an e mail alert to all buyers 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 buyers. 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 buyers’ UST from being staked through OKX Earn gave buyers an opportunity to keep away from additional loss on their UST, which didn’t preserve 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 consequences triggered by the extreme volatility within the markets, highlights the advantages of utilizing a centralized alternate 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 supply consumer safety and danger mitigation if and when issues go unsuitable for the protocol in query.

After all, there should be a steadiness between the founding values of crypto — independence, decentralization, freedom, “trustless” safety — and danger mitigation for folks and corporations who need to spend money on, earn or commerce crypto. On the finish of the day, all of us need everybody to have protected 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 significant function to play in facilitating safer entry to decentralized finance by means of superior risk-mitigation techniques. As increasingly new folks enter the thrilling world supplied by blockchain expertise, we will present steering, experience and risk-mitigations to assist make 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 danger, and readers ought to conduct their very own analysis when making a call.

The views, ideas and opinions expressed listed below are the writer’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 Providers Group. With 15 years of expertise within the worlds of monetary companies and fintech, Lennix performs a key function in OKX’s transformation from a regular centralized alternate into the biggest hub for DeFi companies, nonfungible tokens and blockchain gaming — in addition to crypto buying and selling.