Leverage in DeFi has soared to 2021 highs: what's the reason?
The decentralized finance (DeFi) sector is once again in the spotlight: the leverage ratio has surged sharply, reaching levels last seen in 2021. This is an alarming signal traditionally associated with rising systemic risks. However, unlike past cycles, the current dynamics are driven not by increased demand for borrowed funds, but by a specific factor — a rapid decline in the total value locked (TVL).
Why has leverage risen while the market is not celebrating?
The leverage ratio, which shows the ratio of borrowed capital and margin positions to the total value of collateral, has risen to 38%. The reason is not that traders have become more active in taking out loans, but that the base of assets used as collateral has significantly decreased.
The decline in TVL began in the spring, when the sector faced a series of large-scale hacker attacks. The most serious damage was suffered by two major platforms:
- Kelp DAO — losses amounted to approximately $292 million due to a protocol vulnerability.
- Drift Protocol — also suffered a serious exploit by attackers.
After these incidents, investors began to massively withdraw capital, fearing for the safety of their funds. As a result, the total value of collateral dropped sharply across many blockchain networks. According to estimates, the April exploits triggered an outflow of TVL of approximately $13 billion.
Thus, the change in proportions occurred not because of an increase in borrowing, but because of a decline in the volume of collateral assets. Traders did not take out more loans, but the overall asset base shrank significantly.
The situation now looks extremely unstable. Even after the local stabilization of the market, the volumes of margin positions have not decreased. This means that the ecosystem retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures.
My expert assessment: The market has found itself in a trap — leverage has increased not from "fat" bullish sentiment, but due to a crisis of confidence. Until the sector recovers from the spring security attacks, we will see increased volatility and the risk of cascading liquidations. Investors should reconsider their risk management strategies, especially in conditions of low liquidity.