Can Cross-Margining in DeFi Create a Systemic Risk for the Entire Cryptocurrency Ecosystem?

Yes, cross-margining in DeFi poses a significant systemic risk. Many DeFi protocols are highly interconnected, with assets from one protocol used as collateral in another.

A death spiral in a single, major DeFi asset could trigger a cross-protocol liquidation cascade. For example, if a widely used liquid staking token collapses, it could cause mass liquidations across numerous lending, borrowing, and derivatives protocols that accept it as collateral.

This high degree of composability and interconnectedness means a localized failure can quickly become an ecosystem-wide crisis.