Hook
I found the ghost of a theory in a recent Crypto Briefing piece. It was a quiet article, tucked between market updates and regulatory whispers, about how market shocks from World Cup matches propagate through interconnected markets—and how they decay with distance. The theory was elegant: a shock hits, then ripples outward, losing intensity as it moves away from the source. But as I read it, I felt a familiar unease. In the code of crypto markets, I have seen the opposite: shocks that do not decay, but compound. The ghost of the architect of that theory was not a cryptographer, but a traditional economist. And in the land of 24/7 trading, cross-chain bridges, and leveraged liquidations, their assumptions become a dangerous lullaby.
Context
The article, titled "The Propagation Ladder," was a summary of an observational framework: how a single event—say, a World Cup upset—sends a shockwave through sponsors, betting markets, national indices, and eventually to seemingly unrelated assets. The core claim is that the impact diminishes as the distance from the event increases. This is intuitive in traditional finance: a football match does not directly move oil prices, but it might affect a sports betting ETF. The distance is measured in industry links, geography, and supply chains.
But crypto is not a traditional market. It is a network of protocols, tokens, and narratives where capital flows through smart contracts, not through boardrooms. The distance between a hack on a DeFi protocol and a collapse in a seemingly unrelated NFT collection is often just one shared liquidity pool or one common market maker. I have spent years auditing these connections—first as a junior researcher in Zurich, where I saw a 500 ETH vulnerability dismissed for being "too academic," and later as a partner analyzing institutional allocations. In every crash, I have seen the propagation ladder fail. The shock does not decay; it amplifies.
Core
Let me build a new propagation ladder for crypto—one based on on-chain liquidity overlap, not geographic or industry distance. Imagine a shock: a flash loan attack on a lending protocol. The first-order impact is the protocol’s native token dropping 50%. The second-order impact hits the protocols that hold that token as collateral or in their treasury. The third-order impact hits the market makers who provided liquidity for both, forcing them to rebalance across multiple assets. The fourth-order impact? A systemic deleveraging that drags down even blue-chip assets like ETH and BTC.
In this ladder, the “distance” is not a number of steps; it is a measure of capital entanglement. And here is the critical insight: in crypto, the entanglement is often _closer_ than it appears. Consider the 2022 LUNA crash. The shock source was Terra’s UST depeg. First-order: LUNA price collapse. Second-order: 3AC, which had massive LUNA exposure, went insolvent. Third-order: 3AC’s contagion spread to multiple lending platforms like BlockFi and Voyager, which had lent to 3AC. Fourth-order: the entire market dropped, with BTC losing over 50% in months. The distance measured in industry links was short—but the shock _amplified_ at each step because of leveraged positions and algorithmic dependencies. The propagation ladder did not dissipate energy; it multiplied it.
Why does this happen? In traditional markets, leverage is bounded by regulation and margin calls are slow. In crypto, leverage is nested: you can borrow against a token, use that token as collateral on another protocol, and repeat. The same liquidity pool serves multiple assets. When a shock hits, it triggers a cascade of liquidations that are not independent—they are all connected through the same DeFi infrastructure. The distance metric becomes a function of shared liquidity, not economic sector. And because liquidity is often concentrated in a few pools (like USDC/USDT, or major DEXs), the effective distance between any two assets is small.
I have seen this play out in my own work. In 2024, I was analyzing the impact of a Bitcoin ETF approval on retail sentiment. The shock was positive—ETF inflows were strong. But the propagation ladder showed that the good news did not decay: it amplified through staking narratives, institutional buying, and then into altcoin season. The contagion was not of fear, but of greed. The ladder works both ways.
Contrarian
Here is the contrarian angle: the propagation ladder theory, as presented in the original article, is _dangerously comforting_ for crypto investors. It suggests that if you hold an asset far from the shock source, you are safe. But as I argued, crypto’s distance is not what you think. A project with no direct link to a hacked protocol might still be hit if its market maker uses the same cross-chain bridge. Or if a governance token from a different chain is used as collateral on the same lending platform. The assumption of decay leads to false confidence—and then to larger losses when the shock does not stop.
Moreover, the ladder may be inverted: the weakest links in the chain (small-cap tokens, low-liquidity pools) often suffer the _most_ from a distant shock, because they have no buffer. The shock does not decay; it concentrates on the most fragile nodes. This is the opposite of the original theory. In traditional markets, a distant shock might be absorbed by diversified portfolios. In crypto, the fragmentation of liquidity into thousands of small pools means that a shock in one corner can cause a liquidity crisis in another, far away, because market makers pull capital from all pools to cover losses.
Takeaway
The propagation ladder is a useful metaphor, but we must rewrite its axioms for crypto. Distance is not industry or geography; it is capital overlap. Decay is not guaranteed; amplification is the norm. The next time you hear about a hack or a regulatory action, do not ask how far your asset is from the event. Ask: how many shared liquidity pools, how many common oracles, how many overlapping market makers? The answer will tell you not whether you are safe, but how fast the shock will reach you. When the pool empties, only the intent remains—and the intent of the market is to find the weakest link.