Liquidity Deficit in DeFi: Leverage Soars to 2021 Highs Amid Hacks
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the leverage ratio has surged to levels not seen since 2021. At first glance, this might appear to be a sign of bullish sentiment and active use of borrowed funds. However, a deeper analysis reveals a troubling picture, where the main driver is not a rise in loan demand, but a rapid contraction in total value locked (TVL).
According to my calculations, the current ratio, reflecting the proportion of borrowed capital and margin positions to the total mass of locked assets, has reached 38%. This takes us back to levels seen five years ago, when the market was overheated and less mature. But the nature of this surge is fundamentally different.
Hacks as a Catalyst for Contraction
The trigger was a series of large-scale hacker attacks that hit DeFi this spring. The most painful blows were dealt to two major protocols:
- Kelp DAO — lost approximately $292 million due to a critical vulnerability.
- Drift Protocol — also suffered a serious exploit.
These incidents sparked panic among users. Investors, fearing for the safety of their funds, began to withdraw capital en masse. As a result, the total collateral value dropped sharply across many blockchain networks. As I note in my analytical reports, the April exploits triggered an outflow of TVL of about $13 billion.
It is important to understand: traders did not start taking out more loans. The change in proportion occurred solely due to a decrease in the denominator — the collateral mass. There were fewer assets, while the volume of margin positions remained at the same level, which pushed the ratio to historical highs.
Fragile Equilibrium
Market analysts emphasize that even after a local stabilization, the volume of margin positions has not decreased. This creates an extremely unstable configuration. The ecosystem retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, exacerbating an already tense situation.
Expert comment: The market is in a state of fragile equilibrium. Until TVL recovers to previous levels and user confidence returns, any negative news background could provoke a cascade of liquidations. Investors should exercise extreme caution and avoid excessive leverage in the current conditions.