DeFi leverage has soared to 2021 levels: what is the real reason?
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the on-chain leverage ratio has skyrocketed, reaching levels last seen in 2021. However, unlike the bullish cycles of the past, this current surge is not a sign of healthy growth and risk appetite, but rather an alarming signal caused by structural changes in the market.
Analysis shows that the ratio, reflecting the proportion of borrowed capital and margin positions to the total value locked (TVL), has risen to 38%. At first glance, this might seem like a return of "bullish" sentiment, but the reality is far more prosaic and dangerous. The key driver of this growth is not an increase in lending volumes, but a rapid contraction of the collateral base itself.
Spring "Purge": How Hacks Collapsed TVL
Spring 2024 became a "dark streak" for DeFi security. A series of large-scale hacker attacks led to a colossal outflow of capital from protocols. The most high-profile incidents affected platforms such as Kelp DAO, which lost approximately $292 million, and Drift Protocol, which also suffered a serious exploit.
As a result of these attacks, frightened investors began to massively withdraw their funds, fearing for the safety of their assets. The total value locked (TVL) dropped sharply across many blockchain networks. According to estimates, the April exploits triggered a TVL outflow of roughly $13 billion.
It is this decline in the collateral mass that has distorted the proportions. Traders did not take out more loans—the overall "basket" of assets backing those loans simply shrank significantly. Thus, the rise in the leverage ratio is a mathematical artifact, not a sign of market euphoria.
Fragile Equilibrium: The Risk of Cascading Liquidations
Experts emphasize that even after some market stabilization, the volumes of margin positions have not decreased. This means the ecosystem retains heightened sensitivity to potential liquidations. The situation remains extremely unstable, as the sector has still not fully recovered from the spring security crisis.
My expert assessment: The current configuration of the DeFi market resembles a powder keg. The growth of leverage against a shrinking collateral base is a classic harbinger of systemic risks. Any, even minor, drop in cryptocurrency prices could trigger a chain reaction of forced position closures. In the coming weeks, we may witness sharp movements driven not by fundamental factors, but by the fragility of the lending structure itself. Investors should exercise extreme caution.