Q&A: What lessons must be learned from the crypto crunch?

It's been a bruising few months for the crypto markets. But with things beginning to stabilize, there's now an opportunity to take a step back and figure out what lessons can be learned.

Here, OKX director of financial markets Lennix Lai tells us about the steps crypto businesses need to take to protect investors, what the industry should be doing differently, and how the bear market has affected the behavior of its customers.

1. Hello! Tough question to begin with: Does the crypto industry have a trust issue?

When it comes to the recent liquidity crisis that has significantly affected lenders, I think there is absolutely an issue. The problem is that money managers have been opaque when it comes to how they are investing with users' funds.

To solve this, we need to find a way to separate clients' tokens from managers' in-house wallets while ensuring that those managers fulfill their duties to both their clients and the related communities. Investors need to have knowledge of how their funds are being staked, traded or used as collateral.

2. What needs to be done to protect investors?

Investors need both better transparency into how their funds are being invested and better control over how those investments are being handled. Platforms like OKX's Custody Trading Sub-Account fix this trust issue by giving investors visibility into how their funds are being invested, as well as granting them controls that include trade-freeze level and kill switch.

The industry also needs a renewed focus on risk management. At OKX, we are providing exactly this by acting as a third-party custodian for investors and their funds.

3. And we've seen something of a "contagion effect," with the downfall of one project affecting others?

The "crypto crunch" we're seeing started with LUNA, which offered very high yields for investors. From there, we've seen other high-yield prospects and lenders like BlockFi and Celsius crashing. The liquidity squeeze is what's contagious. 

4. We've seen issues surrounding smart contracts that haven't undergone audits. What is OKX doing to address this?

OKX has an internal team that runs smart contracts for DApps that are listing on our Earn platform. We're also taking a look at third-party auditing for smart contracts.

5. Have you noticed any differences in customer behavior since the bear market began? 

Many users have become less active and quieter in general. Investors are also lowering their leverage.

6. What are the biggest lessons that should be learned following this crypto winter?

Everyone has learned that even the biggest financial managers can get into trouble. Lenders will have learned not to underestimate the liquidity risks of various tokens, like in the case of Celsius with ETH 2.0.

Despite all of this, I'm confident that the industry will evolve. The solution here might be on-chain, or it might come from exchanges like us acting as third-party custodians.

DeFi is also being criticized, but DeFi protocols have been liquidating positions just as their smart contracts dictate. The problem has been people becoming too obsessed with generating high yields with DeFi.

7. You claim you were the only exchange that protected investors against LUNA and UST losses. How did this work? 

Yes, that's true. OKX's risk management systems detected the impending crash days before it actually happened, and then began to alert users and release their assets so they could be traded or sold. This was made possible because OKX has both a dedicated risk detection task force and some of the best risk-management protocols in the industry. Altogether, OKX protected more than 500 million UST belonging to more than 9,000 users.

8. Do regulators need to ensure that retail funds are separated from institutional funds in the crypto space? 

Funds should be separating client monies from house funds. That is a standard requirement. 

9. What are your top priorities for protecting crypto investors in the next 12 months? 

We're going to keep doing what we've been doing — that is, to continue enhancing our risk management systems, to continue undertaking smart contract audits and to keep educating users with our responsible trading programs.