Terra Meltdown Highlights Benefits of CEX Risk Management Systems – Cointelegraph | Region & Cash

The collapse of Terra’s ecosystem – namely the native coin LUNA and the algorithmic stablecoin TerraUSD (UST) – shook the broader blockchain and cryptocurrency ecosystem. Not only did Terra ecosystem tokens (like Anchor’s ANC) plummet in value, but widespread fear, uncertainty, and doubt kept market-leading cryptocurrencies Bitcoin (BTC) and Ether (ETH) below $27,000 and $1,800, respectively, on some exchanges fall.

As of this writing, the cryptocurrency market has still not recovered — even though Terra’s contagion has been mostly contained.

Related: What happened? The Terra debacle exposes vulnerabilities plaguing the crypto industry

A heavy blow to the confidence of the industry

Crypto market participants — and particularly those involved in LUNA and UST — were wiped out in the collapse of the two assets. For people who pocketed the supposedly safe “stablecoin” weakly pegged to the dollar to earn interest, the UST death spiral was downright brutal. Not only hedge funds, but also private individuals have lost a lot of money. In some cases they lost their life savings.

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

The regulators took the bait

Regulators were quick — almost too quick — to use Terra’s dramatic breakup as an example of why regulation of stablecoins (and decentralized finance) is needed. U.S. Treasury Secretary Janet Yellen was quick to mention the event in a House Financial Services Committee congressional hearing on the Financial Stability Oversight Council’s annual report to Congress, where she urged lawmakers to develop a “consistent federal framework” for stablecoins to accomplish this address risks.

Related: DeFi: Who, what and how to regulate in a borderless, code-driven world?

Yellen’s comments are relatively tame compared to those of Senator Elizabeth Warren, who has repeatedly berated decentralized finance (and crypto at large) as an industry run by “shadowy supercoders” and criminals. Lawmakers recently wrote with Senator Tina Smith that “investing in cryptocurrencies is a risky and speculative gamble,” among other things. Reading between the lines, the collapse of Terra is fueling the flames of crypto critics in Congress.

The picture being painted by some lawmakers — and certainly not just those in the US — 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 they aren’t busy misrepresenting that they’re primarily used by criminals).

However, this painting is not exactly realistic.

The role of CEXs in risk management and user protection

The old “wild west” days of the cryptocurrency industry are long gone – at least in the area of ​​centralized exchanges (CEX). Indeed, many advanced trading platforms with centralized order books offer safety nets and risk mitigation measures with the sole purpose of protecting their users from severe market volatility.

For example, after the crypto market collapse around LUNA and UST last week — which was devastating for so many crypto investors and traders — OKX stood out as a cryptocurrency exchange that was able to protect its clients from the brutal effects of the meltdown.

I’ll explain how this worked – OKX’s risk management system achieved this by first noticing LUNA’s price volatility and sending an email alert to all investors earning UST on OKX Earn, the crypto earnings aggregator platform of the exchange, which includes DeFi revenue, have deployed offers. In two phases, OKX has released over 500 million UST owned by over 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 was cleared from staking.

Related: Risk Management in Crypto: AKA “The Art of Not Losing All Your Money”

The release/unblocking of investors’ UST from staking via OKX Earn gave investors the opportunity to avoid further losses on their UST, which failed to maintain its peg to the dollar.

Why risk management is important in crypto

The collapse of Terra and its wider impact on the cryptocurrency market shows why crypto exchanges need advanced risk management systems – especially when they offer access to decentralized finance (DeFi) protocols that offer cheap returns. The response of OKX’s risk management system, which gave traders a chance to protect themselves from the impact unleashed by the severe volatility in the markets, underscores the benefits of using a centralized exchange platform for “doing DeFi”. Rather than “going it alone” so to speak and relying on Anchor or other protocols, leveraging the offerings of a CEX can offer users protection and risk mitigation if and when something goes wrong with that protocol.

Of course, there has to be a balance between the core values ​​of crypto — independence, decentralization, freedom, “trusted” security — and mitigating risk for individuals and businesses looking to invest, earn, or trade in crypto. Ultimately, we all want everyone to have secure and independent access to the ever-expanding world of crypto. However, not everyone is willing (or even willing) to take on all the risks themselves.

Centralized exchanges still play an important role in facilitating safer access to decentralized finance through advanced risk mitigation systems. As more and more new people enter the exciting world of blockchain technology, we can offer advice, expertise and risk mitigation to ensure they – at the end of the day – stay with it.

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

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

lenix lai is CEO of OKX. He leads the business strategy and operations for OKX international. Before joining OKX, Lennix held positions at JP Morgan, AIG and the Cash Financial Services Group. With 15 years of experience in the financial services and fintech world, Lennix is ​​playing a key role in transforming OKX from a standard centralized exchange into the largest hub for DeFi services, non-fungible tokens and blockchain games – as well as crypto trading.