Terra’s meltdown highlights benefits of CEX risk-management systems

Terra’s meltdown highlights benefits of CEX risk-management systems

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

As of the time that I’m writing this article, the cryptocurrency market still hasn’t recovered — even if Terra’s contagion has been mostly contained.


A huge blow to industry confidence

Crypto market participants — and especially those involved with LUNA and UST — were wiped out in the collapse of the two assets. For people who were staking the supposedly safe “stablecoin” tenuously pegged to the dollar to earn interest, the UST death spiral was absolutely brutal. Not just hedge funds, but regular individuals 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 with staking algorithmic stablecoins, despite a history of experimental failures on the algo-stable front and no successful implementations.

Regulators took the bait

Regulators were quick — almost too quick — to use Terra’s dramatic unwinding as an example of why stablecoin (and decentralized finance) regulation is required.

United States Treasury Secretary Janet Yellen was quick to mention the event in a Congressional hearing of the House Financial Services Committee on the Financial Stability Oversight Council’s Annual Report to Congress, where she requested lawmakers develop a “consistent federal framework” on stablecoins in an effort to address risks.

Yellen’s comments are relatively tame when compared to Senator Elizabeth Warren’s, who has repeatedly lambasted decentralized finance (and, by and large, crypto) as an industry run by “shadowy super coders” and criminals.

The lawmaker also recently wrote with Senator Tina Smith that “investing in cryptocurrencies is a risky and speculative gamble,” among other things. Reading between the lines, Terra’s collapse is throwing fuel on Congressional crypto critics’ fires.

Hot Topics

U.S., Japan, Australia, And India To Launch Tracking System To Monitor Illegal Fishing By China- FT

Mashinsky Says ‘Sharks Of Wall Street’ Circling Around Celsius And Other Projects

Safe-Haven Dollar Eases After Wednesday's Jump, But Risk Sentiment Remains Fragile

The picture being painted by some lawmakers — and certainly not just by those in the U.S. — is that the crypto industry is a dangerous place for people to invest their money. They often cite a lack of regulations, user protections and risk-mitigation systems (when not busy falsely stating its primarily used by criminals).

However, this painting isn’t exactly a realistic one.

The role of CEXs in the risk management and user protection

The old “Wild West” days of the cryptocurrency industry are long-gone — at least, in the centralized exchange (CEX) space. Many advanced trading platforms with centralized order books do, in fact, provide safety nets and risk-mitigation measures with the sole purpose of protecting their users from severe market volatility.

As an example, in the wake of the crypto market collapse around LUNA and UST last week — which was devastating for so many crypto investors and traders — OKX stood out as cryptocurrency exchange that was able to protect its customers from the brutal effects of the meltdown.
I’ll explain how that worked — OKX’s risk-management system accomplished this by first noticing the price volatility of LUNA and sending an email alert to all investors who were staking UST on OKX Earn, the exchange’s crypto-earning aggregator platform that includes DeFi earning offerings.

Over two phases, OKX released over 500 million UST belonging to 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 had been released from staking.

Releasing/unlocking investors’ UST from being staked via OKX Earn gave investors a chance to avoid further loss on their UST, which failed to maintain its peg to the dollar. - Cointelegraph

Featured Brokers

Left Banner
Right Banner