Isolated Risk Model

Definition ∞ An isolated risk model assesses and manages potential financial or operational risks within a specific component or subset of a larger system, treating it independently from other parts. This approach allows for focused analysis of vulnerabilities without the complexities of broader systemic interactions. It helps to identify and mitigate localized threats more effectively. Such models are valuable for understanding specific exposures in complex digital asset protocols.
Context ∞ In decentralized finance (DeFi), isolated risk models are increasingly important for evaluating the security and stability of individual lending pools or collateral types. Discussions often concern how to accurately define the boundaries of isolation and prevent contagion from other protocol components. News about new DeFi protocols or risk assessments frequently highlights the application of these focused models to manage exposure.