What Is Systemic Risk in the Context of a Stablecoin Backed by a Single Volatile Asset?

Systemic risk is the risk of the entire financial system collapsing due to the failure of one or more large components. If a stablecoin is heavily backed by a single volatile asset, a sudden, massive price drop in that asset could trigger widespread liquidations.

This could lead to the stablecoin's de-pegging and a loss of confidence that spreads across the entire DeFi ecosystem, causing a cascading failure.