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 (reminiscent of 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 largely contained.
Related: What occurred? Terra debacle exposes flaws plaguing the crypto business
An enormous blow to business confidence
Crypto market individuals — and particularly these concerned with LUNA and UST — had been worn out within the collapse of the 2 property. For individuals who had 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 lots of cash. In some circumstances, they misplaced their life financial savings.
Unfortunately, most common customers (and even some of the hedge funds) had 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 had 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 House Financial Services Committee on the Financial Stability Oversight Council’s Annual Report to Congress, the place she requested lawmakers develop a “consistent federal framework” on stablecoins in an effort to deal with dangers.
Related: DeFi: Who, what and how you 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 enormous, crypto) as an business run by “shadowy super coders” and criminals. The lawmaker additionally just lately wrote with Senator Tina Smith that “investing in cryptocurrencies is a risky and speculative gamble,” amongst different issues. Reading 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 take a position their cash. They typically cite a scarcity of laws, consumer protections and risk-mitigation systems (when not busy falsely stating its primarily utilized by criminals).
However, 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 business are long-gone — no less than, within the centralized change (CEX) house. Many superior buying and selling platforms with centralized order books do, actually, present security nets and risk-mitigation measures with the only real objective of defending their customers from extreme market volatility.
As an 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 change 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 completed this by first noticing the worth volatility of LUNA and sending an e-mail alert to all traders who had 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 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.
Related: Risk administration in crypto: Aka ‘the art of not losing all your money’
Releasing/unlocking traders’ UST from being staked through 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 danger administration issues in crypto
The Terra collapse and wider results on the cryptocurrency market exhibit why crypto exchanges want superior danger administration systems — 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 benefits of utilizing a centralized change platform for “doing DeFi.” Instead of “going it alone,” so to talk, and staking on Anchor or different protocols, using a CEX’s choices might provide consumer safety and danger mitigation if and when issues go fallacious for the protocol in query.
Of course, there should be a stability between the founding values of crypto — independence, decentralization, freedom, “trustless” safety — and danger mitigation for individuals and corporations who need to put money into, earn or commerce crypto. At the tip of the day, all of us need everybody to have protected and unbiased entry to the ever-growing world of crypto. However, not everybody is prepared (and even desires) to tackle all of the dangers themselves.
Centralized exchanges nonetheless have a significant function to play in facilitating safer entry to decentralized finance by superior risk-mitigation systems. As increasingly new individuals enter the thrilling world provided by blockchain know-how, we are able to present steerage, experience and risk-mitigations to assist be certain that — on the finish of the day — they stick round.
This article doesn’t include funding recommendation or suggestions. Every funding and buying and selling transfer includes danger, and readers ought to conduct their very own analysis when making a choice.
The views, ideas and opinions expressed listed below are the writer’s alone and don’t essentially mirror or signify the views and opinions of Cointelegraph.
Lennix Lai is the managing director of OKX. He leads the enterprise technique and operations for OKX, internationally. Before becoming a member of OKX, Lennix served at JP Morgan, AIG and Cash Financial Services Group. With 15 years of expertise within the worlds of monetary providers and fintech, Lennix performs a key function in OKX’s transformation from a typical centralized change into the most important hub for DeFi providers, nonfungible tokens and blockchain gaming — in addition to crypto buying and selling.
