DeFi leverage has returned to the peaks of 2021: what is driving this growth
The decentralized finance (DeFi) sector has once again come under the spotlight: the leverage ratio has surged sharply, reaching levels last seen in 2021. The current indicator has risen to 38%, a direct consequence not of increased demand for borrowed funds, but of a rapid contraction in the total value locked (TVL).
This dynamic is a warning signal for the market. Historically, such changes in capital structure indicate an increase in systemic risks. However, the current situation has its own specifics: it was triggered not by market hype, but by a series of large-scale hacks that shook the industry this spring.
Hacks as a Catalyst for Change
The wave of hacker attacks led to a massive outflow of capital from DeFi protocols. Investors, fearing for the safety of their funds, began actively withdrawing assets. Two major platforms suffered the most significant losses:
- Kelp DAO — a vulnerability led to a loss of approximately $292 million.
- Drift Protocol — also faced serious exploitation by malicious actors.
As a result of these incidents, the total TVL in the ecosystem sharply declined. According to estimates, the April exploits triggered an outflow of funds of about $13 billion. It is this drop in collateral mass, not an increase in the number of margin positions, that caused the leverage ratio to spike.
A Fragile Equilibrium
It is important to understand: traders did not start taking out more loans. The base of assets against which these loans were issued simply decreased significantly. As industry analysts emphasize, even after the local stabilization of the market, the volume of margin positions did not decrease. This means the ecosystem retains heightened sensitivity to potential liquidations.
The current situation appears extremely unstable. The sector has not yet fully recovered from the spring security crisis. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, leading to a new wave of volatility.
My professional opinion: The market is trapped. On one hand, high leverage makes it vulnerable to cascading liquidations. On the other, restoring trust and attracting new capital requires time and the absence of new incidents. Until the industry addresses fundamental security issues, this "powder keg" will remain a source of elevated risk for all participants.