Today the Organisation for Economic Co-operation and Development (OECD) published a report on the lessons to be learned from the crypto winter. The report highlighted many well-known issues such as concentration risk, leverage, interconnectedness, and opacity in the cryptocurrency sector. However, it also draws attention to some key areas that haven’t received sufficient attention.
For example, it acknowledges that DeFi lending protocols operated far better than their centralized counterparts. However, it believes that the automated liquidation of collateral exacerbates market movements and hence contributes to crashes. “Further analysis needs to be undertaken to test the effect that liquidations have had on market volatility,” says the report.
While novel and interesting, financial innovations such as staking contribute to volatility and risk in the crypto-asset sector. The issue with staking is people lock up assets for extended periods of time. This can create maturity mismatches and liquidity risks.
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