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Financial markets are a complex set of interlinked systems. Decentralized finance (DeFI) markets are even more complex: they move faster, are global in nature, and are infinitely more composable. These characteristics, unique to DeFi markets, have always been a feature, not a bug. However, complex interlinked systems like DeFi are at greater risk of suffering from cascading events, which are events that take place through a chain reaction and are often uncontrollable and happen in quick succession. In this article, William Starr, FTC investor and Technical Lead, and Liang Wu, Web 3 Research fellow at HBS look at Lido’s stETH token, particularly the stETH depegging that happened in June 2022 as a case study to shed light on what we can learn from cascading events.
While it sometimes may seem like nothing can go wrong, there is always a chance it does. This chance increases with increasing complexity in protocol design. A system-wide cascade can be caused by a variety of factors that originated in various parts of the system unidentifiable to you. And even after successfully identifying the origin of the problem, you must then embark on a tedious and exertive journey: convincing others you’re right. Seeing contagion in the purview of cultural milieu requires building conviction across multiple parties and entities, all while accounting for their different drivers and incentives.
https://fintech.io/articles/steth-depegging-a-case-study-of-cascading-events
