GlossaryAdvanced
Systemic Risk
The risk that the failure of one participant triggers failures across a broader interconnected system, rather than staying contained to that one participant.
Systemic risk is the risk that the failure of one participant — a platform, protocol, or asset — triggers a cascade of further failures across a broader, interconnected system, rather than the initial failure staying contained to that one participant alone.
DeFi's deep composability (see Kaavon's "Composability" glossary definition), where protocols frequently build directly on top of one another, is a well-documented source of systemic risk specific to crypto — a failure in one widely-integrated protocol can propagate directly into every other protocol that depends on it.
Examples
- A widely-integrated DeFi protocol failing can propagate systemic risk directly into every other protocol that depends on it, a documented consequence of DeFi's composability.
- Systemic risk is specifically about contagion across a connected system, distinct from the risk any single participant or asset carries in isolation.