Hacked and Impoverished: DeFi Leverage Returns to Dangerous 2021 Levels
The decentralized finance (DeFi) sector is once again flashing a warning signal: the leverage ratio has surged sharply, returning to levels seen five years ago. This is not just a statistical anomaly, but a direct reflection of deep structural problems that emerged after a series of devastating hacks.
Leverage has risen, but not for good reasons
The current ratio, which reflects the proportion of borrowed capital and margin positions to the total value locked (TVL), has reached 38%. At first glance, rising leverage traditionally signals an increased appetite for risk. However, in this case, the driver was not an increase in demand for loans, but a rapid contraction in the base of locked assets itself.
Spring 2025 was marked by a series of large-scale hacker attacks that literally drained several key protocols. The most painful blows hit:
- Kelp DAO — losses amounted to approximately $292 million due to a critical vulnerability.
- Drift Protocol — also suffered serious exploitation by attackers.
These incidents sparked panic among users. Investors, fearing for the safety of their funds, began to withdraw capital en masse. The total value locked (TVL) dropped sharply across many blockchain networks. According to estimates, the April exploits triggered an outflow of liquidity of about $13 billion.
The key point here is that traders did not take out more loans. It is simply that the "denominator" in the equation — the total collateral mass — decreased significantly. Even after a local market stabilization, the volume of margin positions did not decline. This means the system retains heightened sensitivity to potential liquidations.
My view on the situation: We are witnessing a classic "liquidity trap" scenario. The sector has not yet recovered from the spring security crisis, and the high level of leverage makes the ecosystem extremely vulnerable. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, leading to a new wave of volatility and losses. Investors should exercise maximum caution — the current situation resembles a taut string that could snap at any moment.