Terra's melting underscores the benefits of CEX risk management systems

Terra’s melting underscores the benefits of CEX risk management systems – Mail Bonus

The collapse of the Terra ecosystem – i.e. LUNA native currency and TerraUSD algorithmic stablecoin (UST) – shook the broader blockchain and cryptocurrency ecosystem. Not only did the Terra ecosystem brand (like ANC Anchor) collapse in value, but the widespread fear, uncertainty and doubt sent the market-leading cryptocurrencies Bitcoin (BTC) and Ether (ETH) below $ 27,000 and $ 1,800, respectively, in some exchanges.

As of the time I am writing this article, the cryptocurrency market has not recovered – even though Terra’s infection has largely been curbed.

Connected: What happened? Terra debacle exposes flaws affecting the cryptocurrency industry

A big shock for the trust of the industry

Crypto market participants – and especially those involved in LUNA and UST – were wiped out by the collapse of the two assets. For people who were betting on the alleged safe “stablecoin” that was slightly linked to the dollar to raise interest rates, the UST death spiral was absolutely cruel. Not just hedge funds, but ordinary people lost a lot of money. In some cases, they lost their pension savings.

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

Regulators took over the bait

Regulators were quick – almost too quick – to use Terra’s exquisite relaxation as an example of why stablecoin (and decentralized finance) is required. US Treasury Secretary Janet Yellen was quick to mention the incident in the House Financial Services Committee’s congressional report on the Financial Stability Board’s annual report to Congress, asking MPs to develop a “federal framework” for stablecoins in an effort to address risk.

Connected: DeFi: Who, what and how to set rules in a borderless world governed by code?

Yellen’s comments are relatively tame compared to Senator Elizabeth Warren, who has repeatedly criticized decentralized finance (and largely cryptography) as an industry run by “shadow supercoders” and criminals. The legislature also recently wrote to Senator Tina Smith that “investing in cryptocurrencies is a risky and speculative gamble,” among other things. Reading between the lines, Terra’s crash is fueling congressional critics.

The picture that some lawmakers are drawing – and certainly not just from those in the United States – is that the cryptocurrency 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 they are not busy falsely claiming that it is primarily used by criminals).

However, this painting is not directly 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 on the Central Exchange (CEX). Many sophisticated centralized ordering trading platforms actually offer safety nets and risk mitigation measures for the sole purpose of protecting their users from severe market fluctuations.

For example, following the collapse of the cryptocurrency market around LUNA and UST last week – which was devastating for so many cryptocurrency investors and traders – OKX emerged as an cryptocurrency exchange that could protect its clients from the brutal effects of the meltdown. .

Let me explain how it worked – OKX’s risk management system achieved this by first noticing LUNA’s price fluctuations and sending an email to all investors who were placing ICTs on OKX Earn, the stock exchange’s cryptocurrency platform containing DeFi’s earnings sacrifices. In two phases, OKX issued over 500 million UST to over 9,000 investors. The price of ICT in these two stages was $ 0.99 and $ 0.8. OKX also informed Earn users that their ICT had been released from mortgaging.

Connected: Risk Management in Cryptocurrency: Driving the “Art of Not Losing All Your Money”

Releasing / unlocking ICT investors from being mortgaged through OKX Earn gave investors the opportunity to avoid further losses on their USTs, which failed to maintain a link to the dollar.

Why risk management is important in cryptocurrency?

The Terra collapse and wider impact on the cryptocurrency market show why cryptocurrencies need sophisticated risk management systems – especially when they provide access to diversified financial rules (DeFi) that offer favorable returns. The response of OKX’s risk management system, which gave traders the opportunity to be protected from the effects of severe market fluctuations, underscores the benefits of using a central exchange platform to “make DeFi”. Instead of “doing it alone”, so to speak, and emphasizing Anchor or other protocols, using CEX offers can offer user protection and reduce risk if and when things go wrong for that protocol.

Of course, there must be a balance between the basic values ​​of cryptocurrency – independence, decentralization, freedom, “untrustworthy” security – and risk-taking for people and companies who want to invest in, earn or trade in cryptocurrencies. After all, we all want secure and independent access to the ever-expanding world of cryptography. However, not everyone is willing (or even willing) to take all the risk themselves.

Centralized exchanges still have a major role to play in facilitating safer access to decentralized financing through sophisticated risk mitigation systems. As more and more new people enter the exciting world of blockchain technology, we can provide guidance, expertise and risk-taking to ensure that – at the end of the day – they persevere.

This article does not include investment advice or advice. Every investment and business involves risk and readers should do their own research when making a decision.

The views, thoughts and opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect or represent the views and opinions of the Cointelegraph.

Lennix Lai is the managing director of OKX. He leads OKX’s international business policy and operations. Prior to joining OKX, Lennix worked for 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 central exchange to the largest center for DeFi services, unchangeable tokens and blockchain gaming – as well as cryptocurrency trading.