Terra Collapse Highlights the Benefits of CEX Risk Management Systems

The collapse of the Terra ecosystem, namely the native coin LUNA and the algorithmic stablecoin TerraUSD (UST), has shaken the broader blockchain and cryptocurrency ecosystem. Not only have Terra ecosystem tokens (such as Anchor’s ANC) crashed in value, but widespread fear, uncertainty and doubt have sent market-leading cryptocurrencies Bitcoin (BTC) and Ether (ETH) below $27,000 and $1,800, respectively, on some exchanges.

As I write this article, the cryptocurrency market has still not recovered, although the contagion from Terra has been largely contained.

Related: What happened? Terra debacle reveals flaws plaguing the crypto industry

A blow to industry confidence

Players in the crypto market – and especially those involved in LUNA and UST – were wiped out when the two assets collapsed. For people staking the supposedly safe and tenuously dollar-pegged “stablecoin” to earn interest, UST’s death spiral was absolutely brutal. Not just hedge funds, but ordinary individuals have lost a lot of money. In some cases, they lost their savings.

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

Regulators have taken the bait

Regulators were quick – almost too quick – to use the spectacular outcome of Terra as an example of why stable coin (and decentralized finance) regulation is needed. U.S. Treasury Secretary Janet Yellen was quick to mention the event during a House Financial Services Committee congressional hearing on the Stability Supervisory Board’s annual report to Congress. finance, where she called on lawmakers to craft a “coherent federal framework” on stablecoins in an effort to address the risks.

Related: DeFi: who, what and how to regulate in a world without borders and governed by a code?

Yellen’s comments are relatively subdued compared to those of Senator Elizabeth Warren, who has repeatedly castigated decentralized finance (and, as a whole, crypto) as an industry run by “shady super 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, Terra’s collapse is adding fuel to the fires of congressional crypto critics.

The picture painted by some lawmakers — and certainly not just those in the United States — is that the crypto industry is a dangerous place for people to invest their money. They often cite a lack of regulation, user protection and risk mitigation systems (when not busy falsely stating that they are primarily used by criminals).

However, this painting is not exactly realistic.

The role of CEX in risk management and user protection

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 actually provide safety nets and risk mitigation measures with the sole purpose of protecting their users from high market volatility.

As an example, following the crypto market crash around LUNA and UST last week – which was devastating for so many crypto investors and traders – OKX stood out. as a cryptocurrency exchange capable of protecting its customers from the brutal effects of the collapse. .

I’ll explain how it worked – OKX’s risk management system accomplished this by first noticing LUNA’s price volatility and sending an email alert to all investors who staked UST on OKX Earn , the exchange’s crypto earnings aggregation platform that includes DeFi earnings offerings. 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. OKX also notified Earn users that their UST had been released from staking.

Related: Crypto Risk Management: Aka ‘The Art of Not Losing All Your Money’

Releasing/unlocking investors’ UST via OKX Earn gave investors a chance to avoid further losses on their UST, which failed to maintain its dollar peg.

Why Risk Management Matters in Crypto

Terra’s collapse and its wider effects on the cryptocurrency market show why crypto exchanges need advanced risk management systems, especially when providing access to decentralized finance (DeFi) protocols offering favorable returns. OKX’s risk management system response, which gave traders a chance to be protected from the effects triggered by high market volatility, highlights the benefits of using a centralized trading platform to “do DeFi”. Instead of “going it alone”, so to speak, and banking on Anchor or other protocols, using a CEX’s offerings can provide user protection and risk mitigation if and when things turn out. wrong for the protocol in question.

Of course, there must be a balance between the founding values ​​of crypto – independence, decentralization, freedom, “trustless” security – and mitigating risk for people and businesses who want to invest, earn or trade. crypto. Ultimately, we all want everyone to have safe and independent access to the ever-changing world of crypto. However, not everyone is ready (or even willing) to assume all the risk themselves.

Centralized exchanges still have a major role to play in facilitating safer access to decentralized finance through advanced risk mitigation systems. As more and more new people enter the exciting world offered by blockchain technology, we can provide advice, expertise and risk mitigation measures to ensure that they ultimately stick around. .

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

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

Lennix Lai is the CEO of OKX. He leads OKX’s business strategy and operations internationally. Prior to 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 cryptocurrencies. blockchain games – as well as crypto trading.