Leverage in DeFi has soared to 2021 highs: what's the reason?
The decentralized finance (DeFi) sector is experiencing a paradoxical moment: the on-chain leverage ratio has returned to levels last seen in 2021. At first glance, this could indicate increased risk appetite and aggressive position building. However, a deeper analysis reveals a different, much more alarming picture.
The Illusion of Growth: Why Did Leverage Rise?
The leverage ratio, which reflects the ratio of borrowed capital and margin positions to the total value locked (TVL), has sharply jumped to 38%. The key driver of this movement is not an increase in demand for borrowed funds, but a rapid contraction of the locked asset base itself.
Spring 2025 was marked by a series of large-scale hacker attacks that literally drained several major protocols. The most significant blows hit the platforms Kelp DAO (losses of approximately $292 million) and Drift Protocol. As a result of these incidents, investor confidence was undermined, and they began to massively withdraw capital, fearing for the safety of their funds.
The total value locked (TVL) as a result of these events decreased by approximately $13 billion. Traders did not take out more loans—the overall "cushion" of assets supporting the entire system simply shrank significantly. It is this mechanical change in proportions that led to the leverage ratio rising to levels seen five years ago.
Risks of Cascading Liquidations: The System is Stretched to the Limit
Experts note that even after the local market stabilization, the volume of margin positions has not decreased. This means the ecosystem retains heightened sensitivity to potential liquidations. Essentially, we are observing a situation where the ship's "deck" (total collateral) has shrunk, while the "cargo" (borrowed positions) remains the same.
Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures. The sector has still not fully recovered from the spring security crisis, and the current structure appears extremely unstable.
My expert opinion: The market is currently in a phase of fragile equilibrium. The current high level of leverage is not a sign of bullish sentiment, but a "time bomb" planted by hacker attacks. Investors should exercise maximum caution and closely monitor protocols with high levels of borrowing, as they will be the first to be hit during a correction.