Systemic Risk in Decentralized Finance: Interconnectedness and Contagion in DeFi Protocols

We develop a network-based framework to measure systemic risk in the decentralized finance (DeFi) ecosystem. By mapping the interconnections among major DeFi protocols through smart contract interactions and shared collateral pools, we identify critical nodes whose failure could trigger cascading liquidations. Our stress testing framework reveals that the DeFi ecosystem is more fragile than traditional financial networks due to automated liquidation mechanisms and composability risks.