Terra’s blowup emphasizes the value of CEX risk-management systems

 

This month, the cryptocurrency LUNA by Terra burst into flames, which is the worst case scenario for any crypto-investor.

But even if you didn’t invest in Terra, the news should still be a wakeup call for anyone who’s considering investing in cryptocurrency.

The rise in cryptocurrency prices has led to a proliferation of new exchanges, as well as an increase in the number of customers using them. In order to protect themselves against the high risk of cyberattacks and fraud, exchanges are turning to CEX risk-management systems.

In recent years, cryptocurrencies have become highly popular around the world. The value of Bitcoin alone has risen from $1,000 per coin in 2017 to over $10,000 per coin today. The rise in price has led to an explosion of new cryptocurrency exchanges. With so many new exchanges opening up, there is a greater need than ever before for companies that specialize in managing risk related to cryptocurrency exchanges.

The Terra collapse exemplifies why crypto exchanges require comprehensive risk management systems, particularly when giving access to DeFi protocols with attractive returns.

 

The demise of Terra’s ecosystem — specifically, native coin LUNA and algorithmic stablecoin TerraUSD (UST) — shook the larger blockchain and cryptocurrency industry. Not only did the value of Terra-ecosystem tokens (such as Anchor’s ANC) plummet, but widespread anxiety, uncertainty, and doubt drove market-leading cryptocurrencies Bitcoin (BTC) and Ether (ETH) below $27,000 and $1,800, respectively, on certain exchanges.

Even though Terra’s virus has been substantially limited at the time of writing, the cryptocurrency market has yet to recover.

What exactly happened? The Terra disaster reveals vulnerabilities in the cryptocurrency market.

A significant damage to industry confidence

Participants in the cryptocurrency industry — particularly those associated with LUNA and UST — were wiped out when the two assets failed. The UST death spiral was incredibly terrible for users who were staking the purportedly safe “stablecoin” tenuously tethered to the dollar to generate interest. Not just hedge funds, but also ordinary people, lost a lot of money. They lost their life savings in certain circumstances.

Despite a history of experimental failures and no successful implementations, most normal users (and even some hedge funds) were ignorant of the hazards associated with staking algorithmic stablecoins.

The regulators bit the bait.

Regulators were eager — maybe too soon — to point to Terra’s spectacular unraveling as proof that stablecoin (and decentralized finance) regulation is necessary. Treasury Secretary of the United States Janet Yellen was quick to notice the episode during a House Financial Services Committee hearing on the Financial Stability Oversight Council’s Annual Report to Congress, when she recommended lawmakers build a “consistent federal framework” on stablecoins to manage concerns.

Senator Elizabeth Warren has consistently attacked decentralized finance (and, by extension, crypto) as a business governed by “shadowy super programmers” and criminals. Yellen’s views are pretty mild in comparison. Among other things, the politician recently wrote alongside Senator Tina Smith that “trading in cryptocurrency is a dangerous and speculative gamble.” Reading between the lines, Terra’s demise is fueling congressional crypto opponents’ fire.

Some legislators, not only those in the United States, are painting an image of the crypto business as a risky place for consumers to spend their money. They frequently point to a lack of rules, user safeguards, and risk-mitigation procedures (when not busy falsely stating its primarily used by criminals).

This painting, however, isn’t precisely accurate.

CEXs’ roles in risk management and user protection. Users are protected from significant market volatility.

For example, in the aftermath of last week’s crypto market collapse centered on LUNA and UST, which was terrible for many crypto investors and traders, OKX stood out as a cryptocurrency exchange that was able to shield its consumers from the catastrophic repercussions of the meltdown.

OKX’s risk-management system achieved this by first recognizing the price fluctuation of LUNA and issuing an email notice to all investors staking UST on OKX Earn, the exchange’s crypto-earning aggregator platform that includes DeFi earning products. OKX distributed approximately 500 million UST belonging to over 9,000 investors in two parts. During these two stages, the price of UST was $0.99 and $0.8. OKX also informed Earn.

The cryptocurrency industry’s “Wild West” days are over, at least in the controlled exchange (CEX) arena. Many modern trading platforms with centralized order books do, in reality, provide safety nets and risk-mitigation techniques only to safeguard their users.

OKX also told Earn users that their UST was no longer staking.

Risk management in cryptocurrency, sometimes known as “the art of not losing all your money”

Releasing/unlocking investors’ UST from being staked via OKX Earn provided investors with an opportunity to avert additional losses on their UST, which had failed to retain its peg to the dollar.

Why is risk management important in cryptocurrency?

The Terra collapse and its broader implications for the cryptocurrency industry highlight why crypto exchanges require comprehensive risk management systems, particularly when giving access to decentralized finance (DeFi) protocols with favorable returns. The reaction of OKX’s risk management system, which allowed traders to be insulated from the consequences of market volatility, demonstrates the advantages of adopting a risk management system and a platform for centralized exchange for “doing DeFi” Instead of “going it alone” and staking on Anchor or other protocols, adopting a CEX’s products may provide user protection and risk reduction if and when the protocol in issue fails.

Of course, there must be a balance between the core goals of cryptocurrency — independence, decentralization, freedom, and “trustless” security — and risk reduction for individuals and businesses looking to invest in, earn, or trade cryptocurrency. Finally, we all want everyone to have secure and independent access to the ever-expanding world of cryptocurrency. However, not everyone is prepared (or even wants) to take on all of the dangers.

Centralized trades continue to play an important role in enabling  advanced risk-mitigation techniques ensure safer access to decentralized financing. As more individuals explore the fascinating world of blockchain technology, we can give direction, experience, and risk mitigation to assist guarantee that they remain around at the end of the day.

The recent blowup of Terra has highlighted the importance of using a risk-management system to identify and manage potential liquidity issues.

In particular, it demonstrates the importance of:

  1. Having a sound risk-management system with appropriate controls

 

  1. Ensuring that you have adequate liquidity and capital reserves to cover your customers’ deposits

To understand how to manage your own risk, you need to understand what happened with Terra. The exchange reportedly had over $1 billion worth of assets on its platform when it suddenly shut down last week. The company told customers that it had been hacked and all their assets were gone—but many now suspect that the hack was actually an inside job orchestrated by its founder, Jehan Chu.

In any case, this is one of the most extreme examples of how CEX risk management can help protect users from loss due to a systemic failure within an exchange or wallet provider’s IT infrastructure or software system. While most people don’t have millions of dollars lying around on their computers overnight (or even at any given time), most do have some amount of money stored within these types of systems—and you should always keep track of how much is there and what kind

A CEX risk-management system (RMS) is a software application that helps companies manage their security protocols and protect themselves against cyberattacks or other types of fraud. An RMS provides companies with real-time information about their customers’ activities on their website or mobile app and enables them to prevent unauthorized access by hackers or other online criminals who may try to steal sensitive information like credit card numbers or passwords from customers’ accounts without their knowledge.”

These systems monitor and measure the various risks involved in investing in a particular country, and then they provide recommendations on how investors can manage those risks.

The rise of CEX risk-management systems is due to the increasing globalization of business operations. Companies are now operating in more countries than ever before, and they want to make sure that they’re not exposing themselves to unnecessary financial risk by investing in certain countries or regions.

CEX risk-management systems are used to manage the risks associated with a company’s exposure to the market. A CEX risk-management system is designed to provide the company with a way to manage the risks they are exposed to and help them predict what these risks will be in the future.

One of the main benefits of using CEX risk-management systems is that they allow investors to better understand their own personal risk tolerance levels. Investors can use these tools to determine whether or not they are comfortable accepting certain levels of risk, which may lead them to change their decisions about where they do business.

The main advantage of CEXs is that they are easy to use and allow people from all over the world to buy or sell their digital assets without having to worry about technical issues. However, it is important for users to understand that a CEX does not actually hold any assets; it only facilitates trades between its users.

The cryptocurrency market is a volatile place, and even the most experienced traders can find themselves caught in a bear market. But with a CEX risk-management system, you can stay on top of your trading even when things go awry.

CEX risk-management systems are designed to help you manage your cryptocurrency portfolio and minimize losses during downturns. With CEX, you can set alerts and take action if one of your holdings is underperforming or if the overall market is down. You’ll also get access to real-time information about the market as well as historical data so you can make informed decisions about where best to invest next.