Mapping Systemic Tail Risk in Crypto Markets: DeFi, Stablecoins, and Infrastructure Tokens

This paper investigates systemic tail dependence within the crypto-asset ecosystem by examining interconnectedness across eight major tokens spanning Layer 1 cryptocurrencies, DeFi tokens, stablecoins, and infrastructure/governance assets. We employ a novel partial correlation-based network framework and quantile-specific connectedness measures to examine how co-movement patterns evolve under normal and extreme market conditions from September 2021 to March 2025. Unlike conventional correlation or variance decomposition approaches, our methodology isolates direct, tail-specific transmission channels while filtering out standard shocks. The results indicate strong asymmetries in dependence structures. Systemic risk intensifies during adverse tail events, particularly around episodes such as the Terra/Luna crash, the USDC depeg, and Bitcoin’s 2024 halving cycle. Our analysis shows that ETH, LINK, and UNI are key assets in spreading losses when the market falls. In contrast, the stablecoin DAI tends to absorb some of the stress, helping reduce risk during downturns. These results indicate critical contagion pathways and suggest that regulation targeting protocol-level transparency, liquidity provisioning, and interoperability standards may reduce amplification mechanisms without eliminating interdependence. Our findings contribute to the emerging literature on crypto-systemic risk and offer actionable insights for regulators, DeFi protocol architects, and institutional investors. In particular, we advocate for the incorporation of tail-sensitive network diagnostics into real-time monitoring frameworks to better manage asymmetric spillover risks in decentralized financial systems.