Abstract
<jats:p>This research examines the systematic contagion channel within decentralized liquidity pools (DeFi) that is connected to the banking system. It's mainly focused on the various variables related to market concentration, (HHI), (VB) noted as Variable borrow rate, (De) represents the number of depositors, (bo) represents the borrower among the cryptocurrencies used by “DAI, USDC (USD Coin), WBTC (Wrapped Bitcoin), USDT (USD Tether)”. Here, the model is used as an Autoregressive Distributed Lag (ARDL) to determine the relationship between the variable and liquidity risk in the Defi lending protocol, such as Aave. H1(It is interconnected to DeFi financial products transmit through systematic risk to the global banking system) Supported which is shows the interconnected Defi Financial product transmits the risk to the global banking system The value of DAU as (-0.707), and USDT as (-0.400), representing the market concentration influenced the depositor liquidity risk. The other types of Hypotheses, H2(examines whether leverage amplification through flash loans and collateralized borrowing increases financial instability between DeFi and traditional banking systems), as validated means, provide results: USDT at 2.945 and WETH at 0.438, which are also defined by the leverage mechanism among flash loans, contributing to financial stability. Accepting H3 implies that R2 is higher for USDT (0.039) and WETH (0.106), indicating liquidity interdependence. To compare USDC and WBTC, the study obtained an R2 value that was low, indicating low interdependence. After the H4(evaluates whether shared technological dependencies between DeFi protocols and traditional financial systems intensify systemic contagion) is accepted, the finding of no significant relationship among the technological dependencies should be reported. Based on all the analysis, the ARDL model approach is suitable for all processes, with the analysis revealing the short- and long-term relationships among mixed stationary processes with I (0) and I (1).</jats:p>