The DeFi leverage ratio has soared to 2021 highs — what's the reason?
The decentralized finance (DeFi) sector is showing a worrying trend: the on-chain leverage ratio has returned to levels last seen in 2021. This metric, which reflects the ratio of borrowed capital and margin positions to the total value locked (TVL), has surged to 38%.
At first glance, the rise in leverage might signal an increased appetite for risk and heightened speculative activity. However, a deeper analysis reveals a different picture: the driver of this movement is not an increase in borrowing volumes, but a sharp contraction in the underlying collateral base.
Hacks Trigger Capital Outflows
The key catalyst was a wave of large-scale hacker attacks that hit DeFi protocols in the spring. The most notable incidents affected the Kelp DAO protocol, which lost approximately $292 million due to a vulnerability, and the Drift Protocol platform, which suffered a serious exploit.
These events sparked panic among users. Investors began withdrawing funds en masse, fearing for the safety of their assets. The total TVL decreased by roughly $13 billion. Meanwhile, traders did not take out more loans—on the contrary, the overall collateral mass shrank significantly.
As a result, the proportion changed not due to an increase in the numerator (borrowed funds), but due to a sharp decline in the denominator (TVL). This is a classic example of how a supply shock distorts standard risk metrics.
Fragile Equilibrium
Analysts emphasize that even after some market stabilization, the volumes of margin positions have not decreased. This means the ecosystem remains highly sensitive to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures.
The current situation appears extremely unstable. The sector has still not fully recovered from the spring security crisis, and the increased leverage against a shrunken asset base is a volatile mix. The market is balancing on a knife's edge, and even a small price movement could trigger a cascade of liquidations similar to what we saw in 2021.
Expert opinion: The rise of the leverage ratio to historical highs is not a bullish signal, but a red flag for the entire DeFi sector. We are not seeing an increase in leverage due to new loans, but a contraction of the underlying collateral due to a loss of trust. Until protocol security is fundamentally improved, any positive price momentum will remain extremely vulnerable.