Recursive Leverage Chains

Recursive leverage chains involve multiple layers of borrowing and lending where each layer relies on the collateral of the previous one. This structure is common in DeFi, where a user can deposit an asset, borrow against it, and then deposit the borrowed asset back into another protocol.

While this maximizes capital efficiency, it creates a fragile chain of dependencies. If any link in the chain fails, the entire structure can collapse.

These chains are highly susceptible to contagion, as a price drop in the underlying asset can trigger liquidations across multiple protocols. Identifying and managing these chains is vital for systemic stability.