The collapse of the Terra ecosystem—specifically, the LUNA native coin and the TerraUSD (UST) algorithmic stablecoin—has shaken the broader blockchain and cryptocurrency ecosystem. Not only did the value of Terra ecosystem tokens (such as Anchor’s ANC) plummet, but widespread fear, uncertainty and doubt caused the leading cryptocurrencies in the market, Bitcoin (BTC) and Ether (ETH), to fall. below $27,000 and $1,800, respectively, on some exchanges.
At the time of writing, the cryptocurrency market has yet to recover, although the contagion from Terra has been contained for the most part.
A major blow to industry confidence
Cryptocurrency market participants – and especially those involved in LUNA and UST – were wiped out with the collapse of the two assets. For the people who were staking the supposedly safe “stablecoin” loosely pegged to the dollar to earn interest, UST’s death spiral was absolutely brutal. Not only hedge funds, but also private individuals lost a lot of money. In some cases, they lost their life savings.
Unfortunately, most regular users (and even some of the hedge funds) were unaware of the risks involved in staking algorithmic stablecoins, despite a history of experimental failures on the algorithmic front. stable and that they had not been implemented successfully.
Regulators took the bait
Regulators were quick – almost too quick – to use the dramatic Terra denouement as an example of the need to regulate stablecoins (and decentralized finance). US Treasury Secretary Janet Yellen was quick to mention the event at a House Financial Services Committee hearing on the Financial Stability Oversight Council’s Annual Report to Congress, calling for on lawmakers to develop a “coherent federal framework” on stablecoins in an effort to address the risks.
Yellen’s comments are relatively mild when compared to those of Senator Elizabeth Warren, who has repeatedly lambasted decentralized finance (and cryptocurrency in general) as an industry run by “super shadow coders” and criminals. The lawmaker also recently wrote with Senator Tina Smith that “investing in cryptocurrencies is a risky and speculative gamble,” among other things. Reading between the lines, the collapse of Terra is adding fuel to the fire of cryptocurrency critics in Congress.
The picture being painted by some lawmakers — and certainly not just those in the United States — is that the cryptocurrency industry is a dangerous place for people to invest their money. They often cite a lack of regulations, user protections, and risk mitigation systems (when not dealing with falsely claiming that it is primarily used by criminals).
However, this picture is not exactly realistic.
The role of CEX in risk management and user protection
The old “wild west” days of the cryptocurrency industry are behind us, at least in the centralized exchange (CEX) space. Many advanced trading platforms with centralized order books actually provide safety nets and risk mitigation measures for the sole purpose of protecting their users from severe market volatility.
As an example, following the cryptocurrency market crash around LUNA and UST last week – which was devastating to so many crypto investors and traders – OKX stood out as the crypto exchanges that were able to protect their clients from the effects. brutal collapse.
I’ll explain how it worked: OKX’s risk management system achieved this by first noticing LUNA’s price volatility and sending an email alert to all investors who were staking UST on OKX Earn, the exchange’s cryptocurrency aggregator platform that includes DeFi earning offers. In two phases, OKX released more than 500 million UST belonging to more than 9,000 investors. The price of UST during these two phases was 0.99 and 0.8 dollars. OKX also notified Earn users that their UST had been released from staking.
The release/unlocking of investors’ USTs from being wagered through OKX Earn gave investors the opportunity to avoid further losses on their USTs, which were unable to maintain their peg to the dollar.
Why risk management is important in cryptocurrencies
The collapse of Terra and its broader effects on the crypto market demonstrate why crypto exchanges need advanced risk management systems, especially when providing access to decentralized finance (DeFi) protocols that offer favorable returns. The response of OKX’s risk management system, which gave traders the opportunity to protect themselves from the effects triggered by severe market volatility, highlights the benefits of using a centralized exchange platform to “do DeFi.” Instead of “going it alone” so to speak, and betting on Anchor or other protocols, using the offerings of a CEX can offer user protection and mitigate risk if things go wrong for the protocol in question.
Of course, there must be a balance between the founding values of cryptocurrencies – independence, decentralization, freedom, “trustless” security – and risk mitigation for individuals and businesses who want to invest, earn or trade cryptocurrencies. At the end of the day, we all want everyone to have secure and independent access to the growing world of cryptocurrencies. However, not everyone is ready (or even willing) to take all the risks themselves.
Centralized exchanges continue to play an important role in facilitating more secure access to decentralized finance through advanced risk mitigation systems. As more and more new people enter the exciting world that blockchain technology has to offer, we can provide guidance, expertise, and risk mitigation to help ensure that – at the end of the day – they stick around.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should do their own research when making a decision.
The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Lennix Lai is the CEO of OKX. He leads OKX’s international business strategy and operations. Before joining OKX, Lennix worked at JP Morgan, AIG and Cash Financial Services Group. With 15 years of experience in the world of financial services and fintech, Lennix plays a key role in transforming OKX from a standard centralized exchange into the largest hub for DeFi services, non-fungible tokens and blockchain games – as well as cryptocurrency trading. cryptocurrencies.
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