Systemic Network Risk

Definition ∞ Systemic network risk refers to the potential for the failure of one component or participant within a digital asset ecosystem to trigger widespread failures across the entire network. This risk is particularly relevant in interconnected decentralized finance (DeFi) protocols where assets are frequently collateralized across multiple applications. A significant exploit or liquidity crisis in one protocol could cascade, affecting other linked protocols and leading to broader market instability. It highlights the interdependence within complex digital asset architectures.
Context ∞ Discussions about systemic network risk often arise during periods of market stress, after major DeFi exploits, or in regulatory analyses of the digital asset sector. Regulators express concerns about the potential for such risks to impact traditional financial markets. Developers strive to build more robust and isolated systems to limit the contagion effect of individual failures.