Opinion: Terra's debacle highlights benefits of CEX risk management systems

The collapse of the Terra ecosystem — namely native currency LUNA and algorithmic stablecoin TerraUSD (UST) — has put the broader blockchain and cryptocurrency ecosystem in trouble. Not only did Terra ecosystem tokens (like Anchor’s ANC) plummet in value, but widespread fear, uncertainty, and doubt sent market-leading cryptocurrencies Bitcoin and Ethereum below $27,000 and $1,800 respectively on some exchanges .

At the time of writing, the cryptocurrency market still hasn’t recovered — even though Terra’s impact has largely been contained.

Huge blow to industry confidence

Cryptocurrency market participants — especially those invested in LUNA and UST — were devastated by the collapse of both assets. For those earning interest on a so-called safe dollar-pegged “stablecoin” pledged, UST’s death spiral has been absolutely brutal. Not just hedge funds, ordinary individuals also suffered heavy losses. In some cases, they lost their life savings.

Unfortunately, most regular users (and even some hedge funds) are unaware of the risks involved in staking algorithmic stablecoins, despite a history of failed experiments in algorithmic stabilization.

Regulators are hooked

Regulators were quick — almost too soon — to point to Terra’s dramatic decoupling as an example of why stablecoins (and decentralized finance) need to be regulated. U.S. Treasury Secretary Janet Yellen was quick to bring up the incident during a congressional hearing before the House Financial Services Committee on the Financial Stability Oversight Board's annual report to Congress, where she asked lawmakers to enact a policy on stablecoins. "coherent federal framework" in an effort to address risk.

Yellen's comments were relatively soft compared with those of Senator Elizabeth Warren. Warren has repeatedly slammed decentralized finance (and cryptocurrencies) as an industry run by "mysterious super-programmers" and criminals. The congressman also recently wrote alongside Senator Tina Smith that "investing in cryptocurrencies is a high-risk speculative gamble." Read between the lines, and Terra’s debacle fuels the ire of crypto critics in Congress.

The scenario that some lawmakers — certainly not just in the U.S. — paint is that the crypto industry is a dangerous place to invest. They often cite a lack of regulation, user protection, and risk mitigation systems (when not busy making up the fiction that it's mostly used by criminals).

However, such descriptions are not entirely true.

The role of CEX in risk management and user protection

Gone are the days of the “Wild West” of yesteryear for the cryptocurrency industry — at least when it comes to centralized exchanges (CEXs). In fact, many advanced trading platforms with centralized order books do provide safety nets and risk mitigations with the sole purpose of protecting their users from severe market volatility.

For example, after last week's cryptocurrency market crash surrounding LUNA and UST - which was devastating to many cryptocurrency investors and traders - OKX stood out as a cryptocurrency exchange protecting its customers from the The brutal impact of the crash.

I'll explain how this works - OKX's risk management system first notices LUNA's price fluctuations and credits all UST investments staked on OKX Earn (the exchange's crypto yield aggregation platform, including DeFi yield products) This is achieved by sending email alerts to the recipient. In two phases, OKX released more than 500 million UST from more than 9,000 investors. The price of UST in these two stages is $0.99 and $0.8 respectively. OKX also notifies Earn users that their UST has been released from staking.

Release/unlock investors' UST through OKX Earn, giving investors the opportunity to avoid further losses on their UST de-pegged from the US dollar.

Why risk management is important to the crypto industry

Terra’s debacle, and its wider impact on the cryptocurrency market, demonstrates the need for advanced risk management systems for cryptocurrency exchanges, especially when offering access to decentralized finance (DeFi) protocols that yield good yields. OKX’s risk management system insulates traders from severe market volatility, highlighting the benefits of “participating in DeFi” using a centralized trading platform. Unlike staking on Anchor or other protocols "on its own", products using CEX can provide user protection and reduce risk when the protocol goes wrong.

Of course, there has to be a balance between the founding values of cryptocurrencies — independence, decentralization, freedom, “trustless” security — and the risk reduction for individuals and companies looking to invest, earn, or trade cryptocurrencies. Ultimately, we all want everyone to enter the ever-growing crypto world safely and independently. However, not everyone is ready (or even wants to) take all the risks on their own.

Centralized exchanges still have an important role to play in facilitating safer access to decentralized finance through advanced risk mitigation systems. As more and more newcomers enter the exciting world offered by blockchain technology, we can provide the guidance, expertise and risk mitigation to ensure they ultimately stay here.

Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness.