Crypto glossary
Contagion
Contagion is the spread of a failure from one crypto firm or protocol to others through loans, shared collateral, deposits and collapsing confidence.
Crypto firms are tightly linked: lenders fund trading desks, exchanges hold deposits for funds, protocols accept each other's tokens as collateral and many players hold the same assets. When one fails, its creditors take losses, forced liquidations push prices down and depositors elsewhere rush to withdraw in case the same thing happens, which can sink otherwise solvent businesses.
The textbook case is 2022. The collapse of Terra's UST and LUNA in May hit funds such as Three Arrows Capital, whose default left lenders including Voyager, Celsius and others with large holes, and the November failure of FTX dragged down firms that had funds on the exchange or loans to its sister trading firm. In DeFi, contagion travels through depegs and liquidation cascades across protocols that use the same collateral.
Contagion is easier to see in hindsight than to measure in advance, because exposures between private firms are rarely public. Not every sell-off is contagion: it describes losses spreading through actual financial links, not just falling prices. Transparency on reserves and liabilities is the main tool for limiting it.
Example
When a large crypto hedge fund defaults on its loans, two lenders that financed it freeze withdrawals within weeks, and their customers in turn pull funds from other platforms.