Systemic Leverage Overlap

Systemic Leverage Overlap refers to the dangerous phenomenon where multiple protocols are exposed to the same collateral assets, often in a recursive manner. A user might borrow against an asset in one protocol, then use the borrowed funds to acquire more of that same asset, and repeat the process in another protocol.

This creates a chain of leverage where a single price drop in the underlying asset triggers liquidations across all these protocols simultaneously. This overlap creates a massive concentration of risk, as the protocols are not as independent as they appear.

If one protocol suffers a crisis, the ripple effects can rapidly engulf others. Managing this risk requires transparency into how assets flow through the ecosystem and limiting excessive re-hypothecation.