DeFi Lending Contagion

DeFi lending contagion refers to the spread of financial distress from one lending protocol to others, or from the broader crypto market to lending protocols. This happens because protocols are often interconnected, with users moving collateral between platforms and using assets from one protocol as collateral in another.

If a major protocol fails or experiences a liquidity crisis, it can trigger a wave of withdrawals and liquidations across the entire ecosystem. This is exacerbated by the reliance on common assets as collateral, such as stablecoins or wrapped tokens.

Contagion risk is a major concern for the stability of the decentralized finance system, as it shows how quickly problems can propagate through an interconnected network of smart contracts.