The Terra collapse illustrates why crypto exchanges need comprehensive risk management systems, particularly when providing access to DeFi algorithms with favourable yields.
The demise of Terra’s ecosystem — particularly, native currency LUNA and algorithmic stablecoin TerraUSD (UST) — shook the larger blockchain and cryptocurrency industry. Not only did the price of Terra-ecosystem tokens (such as Anchor’s ANC) fall, but widespread panic, confusion, and skepticism pushed market-leading cryptocurrencies Bitcoin (BTC) and Ether (ETH) under $27,000 and $1,800, respectively, on certain platforms.
A substantial damage to industrial trust
The breakdown of the two securities wiped out cryptocurrency market players, particularly those involved with LUNA and UST. The UST slow decline was incredibly brutal for users who’d been staked the purportedly safe “stablecoin” dubiously tethered to the dollar to earn interest. Not just fund managers, but also regular folk, lost a lot of money. They suffered huge losses in certain situations.
Considering a history of trial failures and no effective solutions, most regular users (and even some hedge funds) were unaware of the risks associated with staking programmatic stablecoins.
The regulators bit the bait
Regulators were ready — almost too soon — to refer to Terra’s dramatic breakdown as evidence that stablecoin (and decentralised finance) regulations is needed. In a Congressional committee of the House Financial Services Committee on the Financial Conduct Council’s Annual Report to Congress, US Treasury Secretary Janet Yellen was quick to say the event, requesting lawmakers to grow a “consistent federal framework” on stablecoins in an attempt to address threats.
Senator Elizabeth Warren has often described decentralised finance (and, by extension, crypto) as a business run by “shadowy super programmers” and crooks. In contrast, Yellen’s opinions are rather modest. Among many other things, the lawmaker and Senator Tina Smith recently wrote that “dealing in cryptocurrencies is a dangerous and speculative bet.”
Some lawmakers, not only those in the United States, are presenting a vision of the crypto industry as a dangerous place for people to invest their money. They often point to a lack of regulations, user protections, and threat procedures (when not busy falsely stating its primarily used by criminals). This painting, though, isn’t exactly realistic.
CEXs’ roles in risk assessment and user security
The cryptocurrency firm’s “Wild West” heyday are now over, as particular in the centralised exchange (CEX) arena. Many advanced marketplaces with controlled order books do, in fact, provide safety net programs and threat tools to protect their users from severe market instability.
For example, in the midst of last week’s crypto financial meltdown focused on LUNA and UST, which was devastating for many crypto investors and traders, OKX stood out as a cryptocurrency exchange that was able to protect its users from the devastating effects of the meltdown.
Why risk management matters in crypto
The Terra crash and its repercussions for the crypto industry highlight why crypto exchanges demand advanced risk management systems, particularly when allowing access to decentralised finance (DeFi) methods with advantageous returns. The response of OKX’s risk management plan, which enabled traders to be protected from the effects of market turmoil, emphasises the benefits of utilising an unified trading platform for “doing DeFi.” Instead of “going it alone” and depending on Anchor or other methods, utilising a CEX’s products could provide the benefits and risk reduction if and when the system in issue fails.
Of course, there must be a balance between the founding values of crypto — independence, decentralisation, freedom, “trustless” security — and risk mitigation for people and companies who want to invest in, earn or trade crypto. At the end of the day, we all want everyone to have safe and independent access to the ever-growing world of crypto. However, not everyone is ready (or even wants) to take on all the risks themselves.
Centralised exchanges still have a major role to play in facilitating safer access to decentralised finance through advanced risk-mitigation systems. As more and more new people enter the exciting world offered by blockchain technology, we can provide guidance, expertise and risk-mitigations to help ensure that — at the end of the day — they stick around.
