The DeFi leverage ratio has soared to 2021 highs: hackers are to blame
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the on-chain leverage ratio has surged sharply, returning to levels seen five years ago. However, this increase, which typically signals a rise in risk appetite, is not caused by growing demand for borrowed funds but by a dramatic reduction in the total base of locked assets.
My analysis of current data shows that the key indicator—the ratio of borrowed capital and margin positions to the total value locked (TVL)—has jumped to 38%. This is a level we last saw at the peak of the 2021 bull market. But don't be fooled: this is not a sign of a healthy market, but an alarming symptom.
Why DeFi leverage has returned to 2021 levels
The reason for this phenomenon is a series of devastating hacker attacks that hit the ecosystem in the spring. Attackers caused colossal damage, draining hundreds of millions of dollars from various protocols. The most significant losses were suffered by two major platforms:
- Kelp DAO — losses of approximately $292 million due to an exploited vulnerability.
- Drift Protocol — also suffered a serious attack, leading to a massive outflow of funds.
Panic ensued following these incidents. Investors, fearing for the safety of their funds, withdrew capital en masse. As a result, the total value locked (TVL) dropped sharply across many blockchain networks. Estimates indicate that TVL outflows totaled around $13 billion in April alone.
The key point I want to emphasize is that traders did not take out more loans. They did not increase their positions. It's simply that the collateral base shrank so much that, with the volume of margin positions remaining unchanged, the ratio automatically rose. This is math, not market optimism.
Experts note that even after a local market stabilization, the volume of margin positions has not decreased. Thus, the ecosystem retains heightened sensitivity to any further price movements. The situation remains extremely unstable, as the sector has still not fully recovered from the spring security crisis.
My expert conclusion: The current high level of leverage is a "ticking time bomb." Any significant drop in cryptocurrency prices could trigger a cascade of forced liquidations, leading to an even deeper market downturn. The market is in fragile equilibrium, and investors should exercise maximum caution, especially when using borrowed funds in DeFi protocols.