Financial Interconnectivity

Financial interconnectivity refers to the complex network of relationships between different financial institutions, protocols, and markets. In the modern financial system, these links are often hidden and include shared collateral, common counterparties, and similar risk exposures.

When one part of the system experiences a shock, it is transmitted through these connections to others. This is particularly relevant in the crypto space, where platforms often use the same assets as collateral for various products.

A crisis in one lending protocol can quickly affect liquidity providers, derivative platforms, and even stablecoin issuers, creating a cascading effect that is difficult to contain once it begins.