DeFi hacks have triggered a surge in leverage to levels seen in 2021
The decentralized finance sector is experiencing a paradoxical moment: the leverage ratio has surged sharply, returning to levels seen five years ago. This is not a sign of a borrowing boom, but an alarming signal caused by a fundamental shift in market structure.
Why DeFi leverage has returned to 2021 levels
The ratio, which reflects the proportion of borrowed capital and margin positions to the total value locked (TVL), has jumped to 38%. The key driver is not an increase in loan demand, but a rapid contraction in the volume of collateral. This spring, the sector faced a series of large-scale hacker attacks that triggered a massive capital outflow.
The two largest platforms suffered the most damage:
- The Kelp DAO protocol lost approximately $292 million due to a critical vulnerability.
- The Drift Protocol project also experienced serious exploitation by malicious actors.
Following these incidents, investors began massively withdrawing funds, fearing for the safety of their savings. The total value of collateral dropped sharply across many blockchain networks. According to data, the April exploits triggered a TVL outflow of approximately $13 billion.
As a result, the change in proportions occurred due to the decline in the volume of collateral. Traders did not take out more loans, but the overall asset base significantly contracted. Even after the local stabilization of the market, the volume of margin positions did not decrease. Thus, the ecosystem retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures.
My analysis: The current situation resembles the calm before the storm. High leverage against a backdrop of low TVL is a classic recipe for cascading liquidations. The market has not yet recovered from the spring security crisis, and any sharp price movement could result in a large-scale sell-off. Investors should exercise maximum caution.