One of the most profound innovations coming out of the blockchain markets, which is often misunderstood and underappreciated, is 24-7-365 liquidations.
Traditional market problems / blockchain market solutions:
- Counterparties can become insolvent or collateral can become worthless while markets are closed, resulting in overnight risk / Blockchain markets are always open and exchanges can manage leverage with liquidations every 30 seconds.
- Dependence on intermediaries to underwrite and monitor credit risk can result in systemic risk / Blockchain exchanges assume their exchange balances are the only assets available for recourse so they limit counterparty risk and tightly manage leverage.
- Layers of counterparties holding collateral and depending on each other make it difficult to assess the overall risk in the system / All collateral is held directly between the exchange and the user, allowing models to respond readily and market risk to be monitored well.
Blockchain risk and liquidation engines have been trained in some of the most volatile and thinly traded markets. The innovation and learning from these engines can also help lower systemic risk and inefficiencies in traditional markets.
24-7-365 liquidations limit the spillover effects of a large failure such as Terra/LUNA to the investors with direct exposure. We do not have governments coming to the rescue to spread the contagion to unwilling participants, which is a good thing for the long-term health of the market.
Terra was a top 20 crypto before the 99% crash. What would happen to the stock market if a top 20 stock lost 99% over 48-72 hours? Trading would be halted and bailouts planned, which would enhance the already widespread insolvency risk.
Blockchain market volatility prepares participants to handle situations like this much better than traditional markets. The dependence on government intervention and the slow pace of movement in traditional markets makes participants complacent and unprepared.