Leverage in DeFi has surged to 2021 highs: what lies behind the alarming signal
The decentralized finance (DeFi) sector has once again come under the spotlight: the leverage ratio has surged sharply, reaching levels last seen in 2021. At first glance, this might appear to be a sign of an active bull market and growing risk appetite. However, as my calculations and analysis show, the reality is far more complex and alarming.
The current spike is driven not by rising demand for borrowed funds, but by a rapid contraction in total value locked (TVL). The ratio, now standing at around 38%, reflects the proportion of margin positions to the total collateral. In other words, as TVL declines, even if the volume of loans remains stable, the ratio automatically increases.
Spring wave of hacks as a catalyst
The key trigger for this dynamic was a series of large-scale hacker attacks that swept through the sector this spring. Attackers inflicted massive damage, siphoning hundreds of millions of dollars from various protocols. The most notable incidents affected:
- Kelp DAO — losses amounted to approximately $292 million.
- Drift Protocol — the protocol suffered a serious exploit.
As a result of these events, investors, fearing for the safety of their funds, began to withdraw capital en masse. The aggregate TVL across many blockchain networks contracted sharply. Estimates suggest that April's exploits triggered a liquidity outflow of roughly $13 billion.
Mechanism of leverage growth and hidden risks
It is important to understand: traders did not start taking out more loans. Rather, the overall base of assets serving as collateral has significantly decreased. Thus, we are witnessing not an increase in leverage, but its artificial inflation due to a shrinking base.
Analysts note that even after the market's local stabilization, the volume of margin positions has not declined. This means the ecosystem retains heightened sensitivity to potential liquidations. The situation remains extremely unstable, as the sector has yet to fully recover from the spring security crisis.
My professional opinion: The current level of leverage is not a sign of strength, but a symptom of market fragility. Until the collateral base recovers, any significant drop in cryptocurrency prices could trigger a cascade of forced position closures. Investors should exercise utmost caution and avoid excessive risk in such uncertain conditions.