The collapse of the Terra ecosystem – the native coin LUNA and the algorithmic stablecoin TerraUSD (UST) – shook up the broader blockchain and cryptocurrency ecosystem. Terra ecosystem tokens (such as Anchor’s ANC) have not only fallen in value, but widespread fear, uncertainty and doubt has prompted market-leading cryptocurrencies, Bitcoin (BTC) and Ether (ETH), to drop at $27,000 and $1,800, respectively, on select exchanges. fell below the dollar.
As of the time of writing this article, the cryptocurrency market has still not recovered, even though Terra’s infection has been largely contained.
Relevant: What happen? The Terra catastrophe exposes flaws plaguing the crypto industry.
A major blow to industry confidence
Crypto market players, especially those associated with LUNA and UST, are wipe In the collapse of both assets. UST’s death vortex was absolutely brutal for those who were staking safe “stablecoins” pegged weakly to the dollar to earn interest. Hedge funds as well as ordinary individuals suffered a lot of losses. In some cases, they lost their lifetime savings.
Unfortunately, most ordinary users (and some hedge funds) were not aware of the risks associated with staking algorithm-based stablecoins.
Regulators have caught the bait.
Regulators have been too quick to use Terra’s dramatic easing as an example of why stablecoin (and decentralized finance) regulation is needed. US Treasury Secretary Janet Yellen was quick to comment on the case at a House Financial Services Committee hearing on the Financial Stability Oversight Council’s annual report at a Congressional hearing. Address the risk.
Relevant: DeFi: Who, what, and how govern in a borderless world of code management?
Yellen’s remarks are relatively docile compared to Senator Elizabeth Warren, who has repeatedly denounced decentralized finance (and cryptocurrencies in general) as an industry run by “shadow supercoders” and criminals. “Investing in cryptocurrencies is a risky and speculative gamble,” Lee recently wrote with Senator Tina Smith. Reading between the lines, Terra’s collapse is throwing fuel into the fire of parliamentary crypto critics.
The picture drawn by some lawmakers as well as US lawmakers is that the cryptocurrency industry is a dangerous place for people to invest their money. They often cite a lack of regulatory, user protection, and risk mitigation systems (false statements that they are mostly used by criminals when they’re not busy).
However, this picture is not realistic.
The role of CEX in risk management and user protection
The old “Wild West” era of the cryptocurrency industry is long gone, at least in the central exchange (CEX) space. Many advanced trading platforms with centralized order books actually offer safety nets and risk mitigation measures with the sole purpose of protecting users from severe market volatility.
For example, last week’s cryptocurrency market crash around LUNA and UST caused devastating damage to many cryptocurrency investors and traders. OKX has emerged as a cryptocurrency exchange capable of protecting its clients from the brutal effects of the collapse. .
Let me explain how it works. OKX’s risk management system achieved this by first identifying LUNA’s price volatility and sending email alerts to all investors who staked UST in OKX accrual, the exchange’s crypto revenue collection platform that includes DeFi revenue. offering. OKX has launched over $500 million in UST owned by over 9,000 investors over two phases. In these two phases, the price of UST was $0.99 and $0.8. OKX also informed earning users that UST has been released from staking.
Relevant: Cryptocurrency risk management: aka ‘technology that does not lose money’
By unlocking/unlocking investors’ USTs from being staked through OKX Earn, investors were able to avoid further losses on USTs that failed to keep pegged to the dollar.
Why risk management is important in cryptocurrency
The Terra collapse and its far-reaching impact on the cryptocurrency market demonstrates why cryptocurrency exchanges need advanced risk management systems, especially when providing access to decentralized finance (DeFi) protocols that offer favorable returns. OKX’s risk management system’s response, which provides traders with the opportunity to be protected from the effects of severe volatility in the market, highlights the benefits of using a centralized exchange platform to “do DeFi”. In other words, instead of “going alone” and relying on Anchor or other protocols, leveraging CEX’s offerings protects users and mitigates risks should something go wrong with the protocol in question.
Of course, there must be a balance between risk mitigation and the founding values of crypto: independence, decentralization, freedom, and “untrusted” security for anyone and company looking to invest, acquire or trade in crypto. 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 to take all the risks on their own.
Centralized exchanges still play an important role in providing more secure access to decentralized finance through advanced risk mitigation systems. As more and more people enter the exciting world provided by blockchain technology, we can provide guidance, expertise and risk mitigation to help them survive to the end.
This article does not contain investment advice or recommendations. All investments and trading involve risks and readers should do their own research when making decisions.
The views, thoughts and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent those of Cointelegraph.
lenix rye I am the managing director of OKX. He leads OKX’s business strategy and operations internationally. Prior to joining OKX, Lennix worked for JP Morgan, AIG and Cash Financial Services Group. With 15 years of experience in financial services and fintech, Lennix plays a key role in transforming OKX from a standard central exchange into the largest hub for DeFi services, non-fungible tokens and blockchain gaming and crypto trading.