Iamveetoria
@iamveektoria
What is a BANK RUN? And does it happen in DeFi❔ A bank run occurs when many customers withdraw their funds from a bank due to concerns about the bank's insolvency or bankruptcy. Bank runs can happen in DeFi (Decentralized Finance), but they manifest differently compared to traditional finance due to the decentralized and transparent nature of blockchain systems. How Bank Runs Happen in DeFi A bank run occurs when too many users withdraw their funds simultaneously due to fear that a platform will become insolvent. In DeFi, this can happen when: → Liquidity Crises If users rush to withdraw funds from a lending platform or liquidity pool and there aren’t enough assets available, the system can collapse. → Smart Contract Exploits If a protocol is hacked, users may panic and withdraw funds, causing a liquidity drain. → Stablecoin Depegging If a stablecoin loses its peg (e.g Terra’s UST crash in 2022), users may rapidly exit, leading to a collapse.
1 reply
0 recast
0 reaction
Iamveetoria
@iamveektoria
→ Overleveraged Liquidations If too many loans are liquidated at once due to price crashes, lenders may withdraw funds to avoid risk, worsening the crisis. → Governance Attacks or Regulatory Actions If a DeFi protocol faces legal scrutiny or governance manipulation, users may lose confidence and withdraw in masses. Examples of DeFi Bank Runs → Terra (UST) & LUNA Collapse (2022) UST lost its peg, triggering massive withdrawals and a total collapse. → Iron Finance (2021) A “bank run” on the TITAN token caused its price to plummet to nearly zero. How DeFi Differs from Traditional Bank Runs → Transparency Users can see real-time liquidity levels on-chain, reducing uncertainty. → No Central Authority Unlike traditional banks, there’s no government bailout or central bank intervention. → Algorithmic Risk Management Many DeFi platforms use automated liquidation mechanisms to prevent total collapse.
0 reply
0 recast
0 reaction