DeFi hacks have collapsed TVL but pushed leverage to 2021 highs
The decentralized finance (DeFi) sector has encountered a paradoxical situation: after a series of major hacks, the on-chain leverage ratio has surged sharply, returning to levels last seen in 2021. This is a worrying signal that traditionally indicates growing systemic risks.
However, the current spike is not driven by increased demand for borrowed funds, but by a rapid contraction in the total value locked (TVL). Investors, frightened by large-scale attacks, have begun massively withdrawing capital, leading to a collapse in the total value of collateral.
Key incidents that triggered the crisis
In the spring of 2023, the DeFi sector suffered colossal losses. The most notable were the hacks of two major protocols: Kelp DAO, where the damage amounted to approximately $292 million, and Drift Protocol, which also faced serious exploitation. These incidents undermined user trust and sparked a panic outflow of funds.
According to analysts, the total TVL in DeFi decreased by about $13 billion. This was the main reason for the leverage ratio rising to 38%: the numerator (volume of borrowed funds) remained virtually unchanged, while the denominator (total value of collateral) sharply decreased.
Risks of cascading liquidations
Even after partial market stabilization, the volume of margin positions has not declined. This means the ecosystem remains highly sensitive to further price movements. Any new drop in cryptocurrency prices could trigger a chain reaction of forced position closures, only worsening the situation.
My comment: The rise in leverage amid a falling TVL is a classic "red flag" for the market. It indicates not healthy growth, but system fragility. Until the sector restores trust and addresses fundamental security issues, we will see increased volatility and the risk of new cascading liquidations. Investors should now exercise maximum caution.