Multi-Protocol Liquidation Contagion

Multi-Protocol Liquidation Contagion occurs when a liquidation event in one protocol triggers liquidations in other protocols due to shared collateral or price feeds. Because many DeFi protocols use the same oracles and the same liquidator bots, a price spike or drop can be propagated across the entire ecosystem simultaneously.

This makes the system highly sensitive to localized failures. To mitigate this, protocols need to implement more diverse oracle sources and more robust liquidation mechanisms that can handle market stress.

Understanding how these protocols are linked is essential for managing systemic risk in the DeFi space. It is a core challenge of protocol architecture.