Leverage in DeFi has soared to 2021 highs — what is the real reason behind it
The decentralized finance (DeFi) sector has once again come under the spotlight: the leverage ratio has surged sharply, reaching levels last seen in 2021. At first glance, this might appear to be a sign of renewed bullish sentiment and active borrowing. However, my data analysis shows that the nature of this phenomenon is fundamentally different and far more alarming.
The current indicator has risen to 38%. The key point here is that the dynamic is not driven by loan demand, but by the supply of collateral. We are not witnessing a rise in margin trading, but a rapid contraction in the total value locked (TVL) base.
Hacks as a catalyst for contraction
The trigger for this dangerous trend was a series of large-scale hacks that swept through the ecosystem in the spring. Attackers dealt devastating blows to key protocols. The most significant losses were suffered by Kelp DAO (approximately $292 million) and Drift Protocol. These incidents sparked panic among asset holders.
Investors, fearing for the safety of their funds, began a mass withdrawal of capital. As a result, the total value locked (TVL) sharply declined. According to my estimates, based on an analysis of network flows, the TVL outflow in April amounted to around $13 billion.
Structural vulnerability, not growth
It is important to understand: traders did not take out more loans. The denominator of the fraction—the total pool of assets—simply shrank dramatically. This mechanically raised the leverage ratio. Analysts confirm that even after a partial market stabilization, the volume of margin positions has not decreased.
This creates an extremely dangerous configuration. The system retains heightened sensitivity to any further price movements. Any, even minor, drop in cryptocurrency prices could trigger a cascade of forced liquidations. The sector has still not fully recovered from the spring security crisis, and the current state of leverage is not a sign of strength, but an indicator of hidden yet high systemic vulnerability.
Analyst's comment: The market finds itself in a paradoxical situation where the rise of a key indicator signals not a healthy appetite for risk, but structural weakness. As long as TVL does not begin to recover, any negative news background could become a trigger for a large-scale liquidation chain. Investors should exercise extreme caution when using borrowed funds in the current environment.