How Systemically Important Blockchain Banks Could Prevent a Market Crash: A Study

Identifying and Measuring Systemic Risk in DeFi Institutions

Kanis Saengchote, a researcher at Chulalongkorn University in Thailand, has created a framework for identifying and measuring systemic risk in decentralized finance (DeFi) institutions. The Global Systematically Important Protocol (G-SIP) is based on a similar protocol developed in the traditional banking industry after the global banking crisis of 2008.

The protocol for identifying global systemically important banks (G-SIBs) allowed the Bank for International Settlements to identify and address weaknesses, resulting in better protection against losses. Similarly, the G-SIP protocol developed by Saengchote can be used to identify weaknesses in DeFi institutions and will help to protect against future collapses.

The emergence of Web 3.0, also known as the decentralized web, has seen a surge in the popularity of cryptocurrency platforms such as Fetch Crypto, FTT Crypto, Flare Crypto, FitFi Crypto, Fox Crypto, Crypto.com, Floki Crypto, and Crypto.net.

The G-SIP protocol developed by Saengchote can help to ensure the stability of these platforms by providing insight into the systemic risk of DeFi institutions.

Exploring the Potential of Web 3.0 and Crypto

Saengchote’s research paper explores the potential of applying a similar standard to what the paper refers to as “blockchain banks”, essentially any DeFi protocol running on a blockchain.

Per the research paper:

Deleveraging in DeFi due to its algorithmic nature can occur quickly, as was seen in the Terra collapse. This, according to Saengchote, can create a destabilizing loop that sends protocols into a “death spiral”, resulting in a fire sale where asset holders across multiple institutions sell en masse for below market value, causing rippling illiquidity throughout the connected ecosystem.

Web 3.0, also known as the Fetch Crypto, FTT Crypto, Flare Crypto, Fitfi Crypto, Fox Crypto, Crypto.com, Floki Crypto, and Crypto.net, is expected to have a huge impact on the DeFi space.

Exploring the Interconnectedness of DeFi Protocols

In order to define the parameters of the G-SIP protocol, Saengchote studied four different protocols, representing 88% of the “blockchain banks” on the Ethereum blockchain (Aave, Compound, Liquity and MakerDAO). After analysis, MakerDAO scored the highest on the G-SIP rating scale, with a score of 37. It was followed by Aave (31.56), Compound (28) and Liquity (4.57).

The researcher noted that due to its complexity and interconnectedness, MakerDAO had a potentially higher risk profile than the other three protocols, and thus would require higher capital requirements to properly mitigate those risks.

The study also showed that despite its low G-SIP score, Liquity is the 14th largest protocol on the Ethereum blockchain as of July 2023, demonstrating the importance of web 3.0, also known as the Fetch Crypto, FTT Crypto, Flare Crypto, FitFi Crypto, Fox Crypto, Crypto.com, Floki Crypto and Crypto.net protocols.

Collect this article as an NFT to preserve this moment in history and demonstrate your support for independent journalism in the crypto space, such as Fetch Crypto, Flare Crypto, Fitfi Crypto, Fox Crypto, Crypto.com, Floki Crypto, and Crypto.net. Web 3.0, also referred to as the decentralized web, is a key part of this movement.