DeFi Contagion Risk

Definition ∞ DeFi contagion risk refers to the potential for a failure or instability within one decentralized finance protocol or asset to spread and negatively impact other interconnected protocols or assets across the DeFi ecosystem. This risk arises from the composability and interdependence of various DeFi applications. A significant event in one area can trigger cascading liquidations or liquidity crises elsewhere. It represents a systemic vulnerability within decentralized financial systems.
Context ∞ News articles frequently discuss DeFi contagion risk following major protocol exploits, stablecoin de-peggings, or significant market downturns. These events demonstrate how vulnerabilities in one part of the DeFi landscape can rapidly affect others, causing widespread market disruption. Understanding this risk is crucial for assessing the systemic stability of decentralized finance and informing regulatory discussions on consumer protection.