Protocol Bank Run

A protocol bank run happens when a large number of depositors simultaneously attempt to withdraw their assets from a lending platform due to fear of insolvency. Because lending protocols often lock liquidity in long-term loans, they may not have enough cash on hand to satisfy all withdrawal requests at once.

This panic can force the protocol to halt withdrawals or liquidate assets at fire-sale prices, further worsening the situation. The expectation of failure becomes a self-fulfilling prophecy, as the rush to exit accelerates the depletion of the protocol's resources.

Preventing bank runs requires maintaining high levels of liquidity and clear communication about the protocol's financial health.