Kanis Saengchote, a researcher at Chulalongkorn University in Thailand, recently developed a framework for identifying and measuring systemic risk in decentralized finance (DeFi) institutions.
The new protocol is called the Global Systematically Important Protocol (G-SIP), and it’s based on a similar endeavor instituted in the traditional banking industry.
After the global banking crisis of 2008, the traditional finance sector collaborated to come up with a protocol for identifying critical banking structures in order to implement strategies for the prevention of future collapses.
Related: UBS Group agrees to $3.25B ‘emergency rescue’ of Credit Suisse
What they came up with is a system to identify and measure “global systemically important banks” (G-SIBs). This allowed the Bank for International Settlements to identify weaknesses and establish standards resulting in better protection against losses.
Saengchote’s research paper details 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.
Per the research paper:
“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.”
Due to the algorithmic nature of DeFi, deleveraging can occur relatively quickly. This was evident in the Terra collapse. According to Saengchote, this can create a destabilizing loop that sends protocols into a “death spiral.”
The resulting fire sale — a period where
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Author: Tristan Greene
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