Protocol Layering Hazards

Protocol layering hazards occur when multiple protocols are built on top of each other, creating a stack of dependencies where the stability of the top layer is contingent on the stability of all layers below it. In the crypto ecosystem, this is common in yield aggregators, which pool capital from users and distribute it across various lending and farming protocols.

If any protocol in the stack fails, the entire aggregator and all the users' funds are affected. This creates a "house of cards" effect, where a small failure at the base of the stack can bring down the entire structure.

These hazards are often poorly understood by users who are attracted by the promise of high yields. Assessing the risks of protocol layering requires a deep understanding of every component in the stack and the ability to evaluate the cumulative risk of the entire system.