Interconnected Leverage Risk

Interconnected leverage risk arises when market participants use leverage across multiple protocols, creating hidden dependencies. A user might borrow against an asset in one protocol to buy more of that asset in another, amplifying their exposure.

If the price of that asset drops, the user faces liquidation across all positions simultaneously, creating massive, sudden selling pressure. This behavior links the risk profiles of otherwise unrelated protocols, making the entire ecosystem more fragile.

Protocols must be aware of this "recursive leverage" to effectively manage their own risk parameters and prevent systemic failure.