GlossaryAdvanced
Contagion (Financial)
The spread of financial distress from one entity to others, through direct exposure, shared counterparties, or a broader loss of confidence.
Financial contagion is the spread of financial distress from one entity to others, through direct financial exposure, shared counterparties, or simply a broader loss of confidence in similar entities once one is seen to be failing.
Several real, well-documented episodes in crypto's history show distress spreading directly between interconnected lending platforms, exchanges, and funds with shared counterparty exposure to one another — a concrete, historical illustration of how systemic risk (see Kaavon's "Systemic Risk" glossary definition) actually plays out in practice, not just a theoretical concern.
Examples
- Financial contagion can spread even to entities with no direct dealings with the original failure, purely through a broader loss of confidence in similar platforms.
- Several documented crypto lending and exchange failures spread directly to other platforms through shared counterparty exposure, a concrete real-world example of contagion.