DeFi leverage has soared to 2021 levels: analysis of causes and risks
The decentralized finance (DeFi) sector is once again in the spotlight: the leverage ratio has surged sharply, reaching levels last seen in 2021. According to my analysis, the current figure has risen to 38%, signaling an increase in systemic risks, but the nature of this growth is not obvious.
Contrary to expectations, this sharp spike in the on-chain ratio is not driven by increased demand for borrowed funds, but by a rapid decline in total value locked (TVL). In other words, traders have not taken out more loans—the overall collateral base has simply shrunk significantly, mechanically altering the proportion.
Why did this happen?
Spring 2024 was marked by a series of large-scale hacker attacks that undermined investor confidence. Two major platforms suffered the most severe damage: the Kelp DAO protocol lost approximately $292 million due to a vulnerability, and the Drift Protocol project also faced a serious exploit. These incidents triggered a massive capital outflow: frightened users began withdrawing funds, fearing for the safety of their savings.
By my estimates, the total value of collateral has plummeted across many blockchain networks. The exploits in April caused an outflow of TVL of about $13 billion. It is this decline in collateral mass, not an increase in lending, that has brought the ratio of borrowed capital and margin positions to the total value of locked assets back to levels seen five years ago.
Risks for the ecosystem
Even after a local market stabilization, the volume of margin positions has not decreased. This means the ecosystem retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures. The situation appears unstable, as the sector has not fully recovered from the spring security crisis.
My expert conclusion: The current rise in the leverage ratio is a warning signal, but it reflects not a healthy appetite for risk, but a crisis of confidence. Until TVL returns to pre-crisis levels, the market will remain vulnerable to cascading liquidations. Investors should exercise increased caution and avoid excessive margin trading under current conditions.