Systemic Risk in DeFi: A Network-Based Fragility Analysis of TVL Dynamics

Paper: arXiv 2601.08540

Authors: Shiyu Zhang, Zining Wang, Jin Zheng, John Cartlidge

Abstract

Systemic risk refers to the overall vulnerability arising from the high degree of interconnectedness and interdependence within the financial system. In the rapidly developing decentralized finance (DeFi) ecosystem, numerous studies have analyzed systemic risk through specific channels such as liquidity pressures, leverage mechanisms, smart contract risks, and historical risk events. However, these studies are mostly event-driven or focused on isolated risk channels, paying limited attention to the structural dimension of systemic risk. Overall, this study provides a unified quantitative framework for ecosystem-level analysis and continuous monitoring of systemic risk in DeFi. From a network-based perspective, this paper proposes the DeFi Correlation Fragility Indicator (CFI), constructed from time-varying correlation networks at the protocol category level. The CFI captures ecosystem-wide structural fragility associated with correlation concentration and increasing synchronicity. Furthermore, we define a Risk Contribution Score (RCS) to quantify the marginal contribution of different protocol types to overall systemic risk. By combining the CFI and RCS, the framework enables both the tracking of time-varying systemic risk and identification of structurally important functional modules in risk accumulation and amplification.

Complexity vs Empirical Score

• Math Complexity: 5.5/10
• Empirical Rigor: 7.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a well-structured network analysis framework to measure systemic risk in DeFi using daily Total Value Locked (TVL) data. It combines Ledoit-Wolf shrinkage matrix estimation with dynamic network indicators, backed by a clear empirical methodology and publicly accessible code for high reproducibility.

Research Flowchart

  flowchart TD
    A[Research Goal: Quantify & Monitor Systemic Risk in DeFi] --> B[Data Input: TVL Dynamics of DeFi Protocol Categories]
    B --> C[Construct Time-Varying Correlation Networks]
    C --> D[Compute Correlation Fragility Indicator - CFI]
    C --> E[Compute Risk Contribution Score - RCS]
    D --> F[Outcome: Track Ecosystem Structural Fragility & Synchronicity]
    E --> G[Outcome: Identify Key Risk-Amplifying Protocol Modules]