DeFi leverage has soared to 2021 highs: what is driving the growth?
Decentralized finance is once again in the spotlight: the on-chain leverage ratio has surged sharply, reaching levels not seen since 2021. The current figure of 38% signals a return to levels from five years ago, but the reasons for this growth are fundamentally different from those during the last bull market.
At first glance, an increase in leverage is traditionally associated with rising demand for borrowed funds and, consequently, with higher systemic risks. However, in this case, the driving force was not an expansion of lending, but a rapid decline in the total value locked (TVL). A spring wave of large-scale hacker attacks triggered a massive outflow of capital from protocols.
The most high-profile incidents were the hacks of the Kelp DAO protocol, which lost about $292 million, and the Drift Protocol platform. Investors, fearing for the safety of their funds, began to urgently withdraw liquidity. As a result, the aggregate TVL fell by approximately $13 billion, distorting the proportion between borrowed capital and margin positions.
Key point: traders did not actively increase their credit positions, but the base of collateral assets significantly decreased. This creates a dangerous imbalance. Even after a local market stabilization, the volume of margin positions has not declined, making the ecosystem extremely sensitive to further price fluctuations. Any new drop in cryptocurrency quotes could trigger a chain reaction of forced liquidations.
The situation remains unstable: the sector has still not fully recovered from the spring security crisis. Until the volume of collateral mass is restored, the elevated leverage will hang like a sword of Damocles over the market, amplifying volatility at the slightest negative movement.
My analysis: The rise in leverage against the backdrop of a falling TVL is not a sign of a healthy market, but a classic "red flag." The market has become more fragile, and the risks of cascading liquidations are now higher than they seem. Investors should exercise increased caution and avoid excessive borrowing of positions in the current conditions.