Event History Is Not State: Observed Pressure Is Not Explained Pressure in DeFi Lending Markets

Abstract

This working paper introduces selected findings from Flow Extraction Theory (FET), an independent research program studying economic-state representation in decentralized financial systems. The paper argues that event history is not equivalent to state, and that observed pressure is not equivalent to explained pressure. Using a bounded Aave V3 case study at Ethereum block 20,000,000, the paper distinguishes historical event evidence, frozen protocol state, token-level representation, account-level aggregate outputs, inference, and unknowns. The study shows that event-derived reconstruction can disagree with exact frozen state, and that health-factor distance can be observed with high confidence while the evidence required to explain that distance remains incomplete. The paper introduces representation risk as the risk created when different evidence classes are collapsed into one operational view of “state.” This public version summarizes selected findings only. It does not disclose implementation details, private tooling, execution logic, complete artifacts, or trading signals.