I had a long talk with Sarah, an accomplished middle-school teacher in her late 30s. She poured most of her life savings into Mantra, lured by the potential for big returns and a chance to get in on the ground floor of the “next big thing” in crypto. With her profits, she would finally be able to take that dream of a community garden to fruition. Now? Sarah's garden remains a dream, and her savings… well, let's just say the crash hit hard. Sarah's story isn't unique. That’s the wake-up call—to remember, under each crash of the market, are real people with real dreams that have been crushed.

Human Frailty or Algorithmic Oversight?

The Mantra crash, where its market cap evaporated from billions to less than millions in hours, wasn’t an isolated event. It was certainly a seismic event exposing major fault lines across the crypto landscape. The Mantra team pointed fingers at "forced liquidations," but let's be real: that's a symptom, not the disease. The toxic cocktail of overleveraged positions and dangerously thin liquidity are the real culprits. This uncomfortable reality is compounded by the stark lack of smart, automated risk management.

Were people greedy? Absolutely. The fear of missing out— or FOMO— is like the most dangerous drug. It encourages investors to pursue returns at all costs without an appreciation for risk. Herd mentality took over, amplifying the volatility. When everyone's running towards the cliff, few stop to ask if it's a good idea. We’ve witnessed this time and again across all asset classes, from tulip mania to the dot-com bubble. It's human nature, plain and simple.

AI could have helped. This doesn’t mean replacing human judgment altogether, but rather augmenting it with real-time, objective, data-driven insights.

AI: The Unbiased Market Watchdog

Consider an AI program that is able to provide real-time monitoring of on-chain activity and which flags unusual patterns that may indicate market manipulation. Recall the Laser Digital crypto wallet that transferred tens of millions of OM tokens just before the crash. An AI might have identified that in real-time, making a major risk warning flag and pulling back the trigger before the start of the liquidation cascade. It’s kind of like having a perpetual, objective, market monitor.

Traditional stress testing? Forget about it. It would be as absurd as showing up to a Formula 1 Grand Prix with a horse-and-buggy. Crypto moves faster than anything, the data is too massive, and it’s too volatile to boot. What we need is AI-driven liquidity stress testing that can dynamically adjust to real-time conditions, proactively finding and addressing extreme risks. Kurtosis-based stress testing, specifically intended to lower the likelihood of catastrophic outlier losses, is a radical departure. Picture extreme risk swing mitigating portfolio creations resulting in a 491% final return, outperforming the very basic investment strategy of ‘buy-and-hold.’ That’s more than admirable; it’s really the proof of how AI is transforming risk management.

AI sifts through order book data and past price patterns to predict future price trends. It captures pressures too, including vulnerabilities like the thin order books we frequently observe on weekend trading. Deep learning models were found to be capable of forecasting Bitcoin (BTC) return changes with high levels of accuracy. Think of it as an analytical meteorological report for the cryptocurrency market. It provides you a limited opportunity to stockpile materials before the storm hits.

AI doesn’t have to be all doom and gloom predictions. It’s about allowing risk management measures to be truly dynamic, such as circuit break-type mechanisms in response to sudden, serious price declines and liquidity fractures. It’s larger than any one corporation or coalition—it’s about constructing a more resilient, stable, and down-the-road, TRUSTWORTHY ecosystem.

Beyond Algorithms: Cultivating Trust

Let's not get carried away. AI isn't a magic bullet. It’s a tool and like any tool it can be used for good or evil. As we solve these issues, we should continue to be on guard about the potential ethical issues that AI presents for finance. We want transparency and accountability for the AI algorithms that produced it. We must avoid a scenario in which AI is used to prey on investors, rather than empower them.

Regulatory frameworks can’t meet the crypto market’s breakneck pace with a go slow approach. AI gives regulators the ability to quickly detect manipulation patterns and other systemic risks. We need to make sure that in deploying these kinds of tools that we don’t stifle innovation. It's a delicate balancing act.

Ultimately, the Mantra crash was more than just human greed or lack of AI. It was about a failure of imagination. Consider a world where technology and human judgment work hand in hand. Together, they can create a more equitable and sustainable financial system for all. To make this future a reality, so that someone like Sarah can pursue her dreams and not have them stamped out by preventable market crashes.

So, what can you do? Call for more transparency and accountability from crypto exchanges and regulators alike. Find out what the dangers of the crypto market are. Make informed investment decisions. And remember, the future of finance isn't just about algorithms. It's about cultivating trust, fostering community, and building a system that works for everyone. Let's build that garden together, shall we?