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Protocol to identify ‘systemically important’ blockchain banks could help prevent a market crash: Study

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The lessons learned from the 2008 traditional finance collapse could just as easily apply to DeFi, argues one researcher.

the Bank for International Settlements to identify weaknesses and establish standards resulting in better protection against losses.a method by which a similar standard could be applied to what the paper refers to as “blockchain banks,” essentially any DeFi protocol running on a blockchain.“Identifying systemic risk and creating contingencies to handle emergencies are important because of the self-reinforcing nature of financial interactions and fire sale-induced deleveraging.

The resulting fire sale — a period where asset holders across multiple institutions sell en masse for below market value — could cause rippling illiquidity throughout the connected ecosystem. The researcher notes, “Because of its small size, Liquity’s score is the lowest among all categories. Nevertheless, as of July 2023, it is the 14th largest protocol in Ethereum.”

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