The wider blockchain and cryptocurrency ecosystem was shaken by the collapse of Terra’s ecosystem, namely native coin LUNA (UST) and algorithmic stablecoin TerraUSD(UST). Terra-ecosystem tokens, such as Anchor’s ANC, suffered a collapse in value. However, the widespread fear, uncertainty, and doubt caused market-leading cryptocurrencies Bitcoin and Ether to drop below $27,000 and $1800 on certain exchanges, respectively.
Even though Terra’s contagion was contained, the cryptocurrency market has not recovered as of the time I am writing this article.
Related: What happened? The Terra scandal exposes the flaws in the crypto industry
Industry confidence suffers a huge blow
Participants in crypto markets, especially those who were involved with LUNA or UST, were all wiped out by the collapse of these assets. The UST death spiral was devastating for those who had staked the supposedly secure “stablecoin” tied to the dollar in order to earn interest. Hedge funds and regular people also lost a lot. Some people lost their entire life savings.
Despite a history of failures and unsuccessful implementations of the algorithmic stablecoins, the majority of regular users, as well as some hedge funds, were not aware of the potential risks associated with holding them.
The bait was taken by regulators
Regulators were quick to point out Terra’s dramatic unraveling as an example of the reasons stablecoin regulation (and decentralized financing) is necessary. Janet Yellen, United States Treasury Secretary, was quick to mention it in a Congressional hearing at the House Financial Services Committee’s Annual Report To Congress. She asked lawmakers to create a “consistent federal structure” for stablecoins to address the risks.
Related: DeFi: What, who, and how can we regulate in a code-governed, borderless world?
Compared to Senator Elizabeth Warren, Yellen’s remarks are more mellow than hers. She has repeatedly criticized decentralized finance (and crypto, in general) as an industry run “by shadowy super coders and criminals.” The lawmaker wrote recently with Senator Tina Smith, among other things, that “investing cryptocurrencies is risky and speculative gambling.” If you read between the lines, Terra’s collapse is fueling the flames of Congressional crypto critics.
Some lawmakers, and not only those in the U.S., are claiming that the crypto industry is dangerous for people to invest money. When they are not busy claiming that the crypto industry is primarily used for criminals, they often point to a lack in regulations, user protections, and risk-mitigation system.
This painting, however, is not realistic.
CEXs’ role in risk management and user protection
The “Wild West” days in cryptocurrency are over, at least for the centralized exchange (CEX). Advanced trading platforms that have centralized order books provide risk-mitigation and safety nets with the sole purpose to protect their users against market volatility.
OKX was the only cryptocurrency exchange to be able protect its customers against the devastating effects of the collapse of crypto markets LUNA/UST and UST last Thursday.
Let me explain. OKX’s risk management system detected the volatility in LUNA’s price and sent an email alert to all investors who were staking UST using OKX Earn, the exchange’s crypto-earning aggregator that also includes DeFi earning opportunities. OKX has released more than 500 million UST to over 9,000 investors over two phases. UST was priced at $0.99 and $0.8 during these two phases. OKX also notified Earn customers that their UST was no longer available for staking.
Related: Risk management for crypto: Aka “The art of not losing your entire money”
Investors had the opportunity to unlock/release their UST that was staked via OKX Earn, thereby avoiding further losses on their UST which fell to the dollar.
How risk management is important in crypto
The Terra crash and other effects on cryptocurrency markets highlight the need for advanced risk management systems, especially when crypto exchanges provide access to Decentralized Finance (DeFi), protocols that offer favorable yields. OKX’s response to the volatility in the market, which allowed traders to be protected, highlighted the importance of using a central exchange platform to “do DeFi.” This may provide users protection and risk mitigation in the event that things go wrong with the protocol.
There must be a balance between crypto’s founding values — freedom, independence, trustlessness security — and risk mitigation for companies and individuals who wish to trade, invest in, or earn crypto. We all want to see everyone have secure and independent access the ever-growing crypto world. But not everyone can or wants to take all the risks.
The centralized exchanges have a significant role to play in providing safer access to decentralized financing through advanced risk mitigation systems. We can offer guidance, expertise, and risk-mitigations in order to ensure that people stay connected as blockchain technology continues to grow.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
OKX’s managing director is Lennix Lei. Lennix Lai is responsible for international operations and business strategy at OKX. Lennix was previously employed at JP Morgan and AIG before joining OKX. Lennix has 15 years experience in financial services and fintech and plays a crucial role in OKX’s transformation to a standard centralized exchange and the largest hub for DeFi, nonfungible tokens, blockchain gaming, and crypto trading.