DeFi-Lego Inheritance Risk
As the first DeFi protocols like Uniswap or MakerDAO and Compound were built, they literally were the initial building blocks of the whole DeFi ecosystem. Since then, many protocols were created that make use of these DeFi OG protocols, either by leveraging their functionalities or their token.
For example if we look at MakerDAO, you can use this protocol to mint the DAI stablecoin, which then can be used as collateral in Alchemix to borrow alUSD, which you can then trade on Sushiswap against ETH or on Curve against USDC.
There exist millions of possibilities how you can do something on protocol A, mint token aBCD, and deploy this token in protocol B to get some extra yield. Actually the whole concept of Yield Farming or collateralized lending follow this approach. Thus we are speaking about the DeFi Money Lego stack, as these protocols are built upon each other like Lego blocks.
But as soon as one of these building blocks suffers a hack, exploit or rug pull, all other protocols on top could be affected as well and thus will create an inheritance of the risk from the underlying protocol or token. The higher the specific protocol sits in the DeFi stack, the higher are the risks of some failure, even if the protocols smart contracts itself are error-free.
Matt | CMK#9019
0 $CMK (internal)