DeFi Analysis: The collapse of TVL has pushed leverage to 2021 peaks
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the on-chain leverage ratio has returned to levels not seen since 2021. This sharp spike is not a sign of healthy market growth, but an alarming signal indicating structural changes in the ecosystem.
Why has DeFi leverage risen to 2021 levels?
The current ratio, reflecting the proportion of borrowed capital and margin positions to the total value locked (TVL), has jumped to 38%. The key driver of this growth is not an increase in loan demand, but a rapid contraction in the volume of collateral assets.
In the spring, the sector faced a series of large-scale hacker attacks that triggered a massive capital outflow. The two most high-profile incidents—the exploitation of the Kelp DAO protocol (losses of approximately $292 million) and a serious attack on the Drift Protocol—undermined investor confidence.
As a result, the total value locked (TVL) sharply declined across many blockchain networks. According to my calculations, the April exploits triggered an outflow of roughly $13 billion. Traders did not take out more loans, but the overall asset base significantly shrank, leading to a distorted proportion.
Even after a local market stabilization, the volumes of margin positions have not decreased. This means the system retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures.
My expert opinion: The current situation resembles the "calm before the storm." The artificial increase in leverage amid declining TVL creates an extremely unstable environment. Until the sector fully recovers from the spring security crisis, the risks of cascading liquidations remain critically high. Investors should exercise maximum caution when using leverage in DeFi protocols.