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


The collapse of Terra’s ecosystem – namely, native coin LUNA and the algorithmic stablecoin TerraUSD (UST) – shook the wider blockchain and cryptocurrency ecosystem. Not only did Terra-ecosystem tokens (such as Anchor’s ANC) drop in value, but widespread fear, uncertainty and skepticism caused market-leading cryptocurrencies Bitcoin (BTC) and Ether (ETH) to drop from $27,000 and $1,800, respectively, on some exchanges. sent down.

As of the time I am writing this article, the cryptocurrency market has still not recovered – even though Terra’s transition has mostly been contained.


related: What happened? Terra Debacle exposes the flaws in the crypto industry

Big blow to the confidence of the industry

Crypto market participants – and in particular those associated with LUNA and UST – were wiped out in the collapse of the two assets. The UST death spiral was downright brutal for those who were undercutting the supposedly safe “stablecoin” to earn interest. Not only hedge funds, but regular individuals lost a lot of money. In some cases, they lost their lifetime savings.

Unfortunately, despite a history of experimental failures on the algo-stable front and no successful implementation, most regular users (and even some hedge funds) were unaware of the risks associated with algorithmic stablecoins.

Regulators took the bait

Regulators were quick – almost too early – to use Terra’s dramatic unwinding as an example of why stablecoin (and decentralized finance) regulation was needed. United States Treasury Secretary Janet Yellen referred to the incident at a congressional hearing of the House Financial Services Committee on the Financial Stability Oversight Council’s annual report to Congress, where she called on lawmakers to develop a “coherent federal framework” on stablecoins in an effort. the requested. Address risk.

related: DeFi: Who, What and How to Regulate in a Borderless, Code-Governed World?

Yellen’s comments are relatively well-known in comparison to Senator Elizabeth Warren, who has repeatedly lambasted decentralized finance (and, overall, crypto) as an industry run by “shady super coders” and criminals. The MP recently wrote with Senator Tina Smith that “investing in cryptocurrency is a risky and speculative gamble,” among other things. Reading between the lines, Terra’s collapse is throwing fuel on the fires of crypto critics in Congress.

The picture being painted by some lawmakers – and certainly not just by those in the US – is that the crypto industry is a dangerous place for people to invest their money. They often cite the lack of regulations, user protection and risk-mitigation systems (when it is not primarily engaged by criminals falsely used).

However, this painting is not realistic at all.

Role of CEX in Risk Management and User Security

The old “Wild West” days of the cryptocurrency industry are long gone – at least, in the centralized exchange (CEX) space. Many advanced trading platforms with centralized order books, in fact, provide a safety net and risk-mitigation measures with the sole purpose of protecting their users from severe market volatility.

As an example, in the wake of the crypto market collapse around LUNA and UST last week – which was devastating to so many crypto investors and traders – OKX stood out as the cryptocurrency exchange that is protecting its clients from the brutal effects of the recession. was able to save. ,

I’ll explain how it works – OKX’s risk-management system accomplishes this by first noticing LUNA price movements and sending email alerts to all investors who bet USTs on OKX earnings Were, the exchange’s crypto-earnings aggregator platform that includes DeFi Earnings. Holy offerings. In two phases, OKX issued over 500 million UST belonging to over 9,000 investors. UST was priced at $0.99 and $0.8 during these two phases. OKX also informed Earn users that their USTs have been exempted from staking.

related: Risk Management in Crypto: aka ‘The Art of Not Losing All Your Money’

The issuance/unlocking of investors’ USTs through OKEx Earn allowed investors to avoid further losses on their USTs, failing to maintain their peg to the dollar.

Why risk management matters in crypto

The Terra collapse and the massive impact on the cryptocurrency market demonstrate why crypto exchanges need advanced risk management systems – especially when providing access to decentralized finance (DeFi) protocols that provide favorable yields. The response to OKX’s risk management system, which gave traders the opportunity to be protected from the effects resulting from severe market volatility, highlighted the benefits of using a centralized exchange platform to “DeFi”. Rather than “going it alone” so to speak, and betting on Anchor or other protocols, using CEX’s offerings can offer user protection and risk mitigation if and when things go wrong for the protocol in question. Huh.

Of course, there has to be a balance between crypto’s founding values ​​- independence, decentralization, independence, “trustworthy” security – and risk mitigation for those and companies who want to invest, earn or trade in crypto. At the end of the day, we all want everyone to have safe and free access to the ever-expanding world of crypto. However, not everyone is ready (or even willing to) take all the risks themselves.

Centralized exchanges still play a major role in facilitating secure access to decentralized finance through advanced risk-mitigation systems. As more and more newcomers enter the exciting world provided by blockchain technology, we can provide guidance, expertise and risk-mitigation to help ensure that – at the end of the day – they all Stay on the side

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.

The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

lenix lye is the Managing Director of OKX. He leads business strategy and operations for OKEx internationally. Prior to joining OKX, Lennix worked at JP Morgan, AIG and Cash Financial Services Group. With over 15 years of experience in the world of financial services and fintech, Lenix has been instrumental in the transformation of OKEx from a standard centralized exchange to the largest center for DeFi services, non-fungible tokens and blockchain gaming as well as crypto trading.