The collapse of Terra’s ecosystem — particularly, native coin LUNA and algorithmic stablecoin TerraUSD (UST) — rocked the broader blockchain and cryptocurrency ecosystem. Not solely did Terra-ecosystem tokens (resembling 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.
An enormous blow to trade confidence
Crypto market contributors — and particularly these concerned with LUNA and UST — have been wiped out within the collapse of the 2 belongings. For individuals who have been staking the supposedly secure “stablecoin” tenuously pegged to the greenback to earn curiosity, the UST demise spiral was completely brutal. Not simply hedge funds, however common people misplaced some huge cash. In some circumstances, they misplaced their life financial savings.
Sadly, most common customers (and even a few of the hedge funds) have 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 have been fast — nearly 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 Home Monetary Companies Committee on the Monetary Stability Oversight Council’s Annual Report back to Congress, the place she requested lawmakers develop a “constant federal framework” on stablecoins in an effort to deal with dangers.
Yellen’s feedback are comparatively tame when in comparison with Senator Elizabeth Warren’s, who has repeatedly lambasted decentralized finance (and, by and huge, crypto) as an trade run by “shadowy tremendous coders” and criminals. The lawmaker additionally recently wrote with Senator Tina Smith that “investing in cryptocurrencies is a dangerous and speculative gamble,” amongst different issues. Studying between the traces, Terra’s collapse is throwing gasoline on Congressional crypto critics’ fires.
The image being painted by some lawmakers — and definitely not simply by these within the U.S. — is that the crypto trade is a harmful place for folks to speculate their cash. They typically cite a scarcity of laws, person protections and risk-mitigation techniques (when not busy falsely stating its primarily utilized by criminals).
Nonetheless, this portray isn’t precisely a sensible one.
The position of CEXs within the danger administration and person safety
The previous “Wild West” days of the cryptocurrency trade are long-gone — not less than, within the centralized alternate (CEX) area. Many superior buying and selling platforms with centralized order books do, in actual fact, present security nets and risk-mitigation measures with the only goal of defending their customers from extreme market volatility.
For example, 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 alternate that was in a position to shield its prospects from the brutal results of the meltdown.
I’ll clarify how that labored — OKX’s risk-management system achieved this by first noticing the value volatility of LUNA and sending an e mail alert to all traders who have been staking UST on OKX Earn, the alternate’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.
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 show why crypto exchanges want superior danger administration techniques — 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 advantages of utilizing a centralized alternate platform for “doing DeFi.” As a substitute of “going it alone,” so to talk, and staking on Anchor or different protocols, using a CEX’s choices could supply person safety and danger mitigation if and when issues go mistaken for the protocol in query.
After all, there should be a stability between the founding values of crypto — independence, decentralization, freedom, “trustless” safety — and danger mitigation for folks and corporations who need to spend money on, earn or commerce crypto. On the finish of the day, all of us need everybody to have secure and impartial entry to the ever-growing world of crypto. Nonetheless, not everybody is prepared (and even desires) to tackle all of the dangers themselves.
Centralized exchanges nonetheless have a significant position to play in facilitating safer entry to decentralized finance by superior risk-mitigation techniques. As an increasing number of new folks enter the thrilling world provided by blockchain know-how, we are able to present steering, experience and risk-mitigations to assist be sure that — on the finish of the day — they stick round.
This text doesn’t comprise funding recommendation or suggestions. Each 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 here are the creator’s alone and don’t essentially replicate or characterize the views and opinions of Cointelegraph.
Lennix Lai is the managing director of OKX. He leads the enterprise technique and operations for OKX, internationally. Earlier than becoming a member of OKX, Lennix served at JP Morgan, AIG and Money Monetary Companies Group. With 15 years of expertise within the worlds of economic providers and fintech, Lennix performs a key position in OKX’s transformation from an ordinary centralized alternate into the most important hub for DeFi providers, nonfungible tokens and blockchain gaming — in addition to crypto buying and selling.