Why Composable Yield Amplifies Contagion Risk

Yield-bearing assets (e.g., stETH, aTokens) are used as collateral to borrow stablecoins, which are then re-deposited to mint more yield-bearing assets. This creates a positive feedback loop that inflates TVL and systemic risk.

• Example: The 2022 stETH depeg triggered margin calls across Aave and Compound.
• Risk Multiplier: A single asset depeg can liquidate positions across $10B+ in interconnected DeFi.

Protocols like Aave V3 with Isolation Mode and Euler's vault-based design segment risk. They treat borrowed assets from specific pools as isolated collateral, preventing contagion from spreading to the core protocol.

• Contagion Firebreak: A failing exotic asset in one module cannot drain the entire lending pool.
• Trade-off: Limits capital efficiency for high-risk assets, a necessary sacrifice for stability.

Virtually all yield strategies rely on price oracles (Chainlink, Pyth). A critical oracle failure or manipulation creates a single point of failure for hundreds of protocols simultaneously.

• Amplified Impact: A faulty stETH/USD feed would cripple lending, derivatives (Synthetix, GMX), and leveraged yield farms.
• Latency Kills: Even a few minutes of stale data can trigger mass, inaccurate liquidations.

Sophisticated protocols use multi-layered oracle security: a primary feed (Chainlink) with a fallback (e.g., Uniswap V3 TWAP). This design, used by MakerDAO and Frax Finance, requires an attacker to manipulate both systems.

• Time as a Shield: TWAPs (Time-Weighted Average Prices) make short-term price attacks economically unfeasible.
• Increased Complexity: Adds latency and integration overhead but is non-negotiable for critical price feeds.

During a crisis, searchers and block builders can front-run liquidations and depeg arbitrage, extracting value and worsening slippage for users and protocols. This turns a market event into a structured attack vector.

• Example: The CRV exploit and subsequent lending pool attacks were exacerbated by MEV bots.
• Result: Protocol losses are amplified, and recovery becomes more expensive and chaotic.

Protocols are integrating MEV mitigation directly into their architecture. Flashbot's SUAVE, CowSwap's batch auctions, and Chainlink's Fair Sequencing Services aim to order transactions fairly.

• In-protocol Auctions: Allow competing liquidators to bid for positions, returning some value to the protocol/user.
• Future State: The goal is to make parasitic extraction unprofitable, turning MEV into a protocol-owned revenue stream.

Yield strategies are nested like Russian dolls. A Curve LP token is deposited in Convex, which is then used as collateral to borrow on Aave to mint a Delta-Neutral Vault on Gearbox. Failure in one primitive triggers a cascade.\n- Hidden Correlation: All strategies chase the same underlying yield (e.g., USDC/USDT pools), creating a monoculture.\n- Liquidation Dominoes: A depeg or exploit can trigger mass, cross-protocol liquidations exceeding $100M+ in minutes.

Adopt the MakerDAO model of isolated collateral vaults. Treat each yield-bearing asset as a unique risk bucket with its own debt ceiling and liquidation parameters.\n- Risk Segmentation: Prevent a Lido stETH depeg from affecting Aave's entire WETH market.\n- Graceful Unwinding: Implement on-chain circuit breakers (like Compound's pauseGuardian) to halt borrow/liquidate functions during extreme volatility, allowing for manual intervention.

Every composable yield stack depends on a Chainlink or Pyth price feed. Manipulate the oracle, and you manipulate the collateral value of every protocol downstream. The Mango Markets exploit was a $114M masterclass in this.\n- Single Point of Failure: A manipulated price for CRV can drain Convex, Aave, and Frax Finance simultaneously.\n- Defense-in-Depth: Require multi-oracle fallbacks (e.g., Uniswap V3 TWAP + Pyth) and price delay mechanisms for critical collateral.

EigenLayer re-stakes $ETH to secure new networks, creating a fundamental, recursive dependency. A slashing event on a downstream Actively Validated Service (AVS) doesn't just lose yield—it can trigger mass unbonding and liquidity crises across Lido, Rocket Pool, and DeFi pools.\n- Meta-Systemic Risk: The base security layer of Ethereum DeFi becomes rehypothecated and re-riskable.\n- Contagion Vector: A failure cascades from the AVS -> EigenLayer -> Liquid Staking Tokens -> All of DeFi.