DeFi hacks have triggered a return of leverage to 2021 levels: a hidden threat to the market
The decentralized finance (DeFi) sector is undergoing a troubling transformation. The leverage ratio — an indicator reflecting the proportion of borrowed capital and margin positions relative to the total value locked (TVL) — has surged sharply, reaching 38%. This brings us back to levels last seen in 2021. However, unlike past cycles, the current rise is not a sign of healthy market expansion, but rather a symptom of deep systemic stress.
The key catalyst for this movement is not an increase in demand for borrowed funds, but a rapid contraction in the overall base of locked assets. In the spring of 2025, the sector faced a series of devastating hacker attacks that led to a massive outflow of capital. Investors, fearing for the safety of their funds, began withdrawing assets, triggering a sharp decline in TVL across many blockchain networks.
The most high-profile incidents involved the Kelp DAO protocol, which lost approximately $292 million due to a critical vulnerability, and the Drift Protocol project, which also suffered serious exploitation. These hacks became the trigger for a panic withdrawal of funds.
According to my analysis, the situation is exacerbated by the fact that the volume of margin positions has remained at the same level, despite the collapse in TVL. This means that traders have not taken on more loans, but the overall "safety cushion" in the form of collateral mass has significantly decreased. As a result, the ecosystem has become extremely sensitive to any price fluctuations. Even a moderate decline in cryptocurrency prices could trigger a chain reaction of forced liquidations, leading to a further escalation of the crisis.
The market has still not recovered from the spring security crisis, and the current leverage dynamics are a clear signal of persistent vulnerability. We are witnessing not a return to a bull market, but a dangerous concentration of risk against a backdrop of reduced liquidity.
My opinion: The current situation is a classic example of a "liquidity trap" in DeFi. The rise in leverage amid falling TVL does not herald growth, but rather creates ideal conditions for cascading liquidations. Market participants should exercise maximum caution and reconsider their risk management strategies, especially in conditions of high volatility.