Leverage in DeFi has soared to 2021 highs: what is driving this growth
The decentralized finance (DeFi) sector has once again come into focus, as the on-chain leverage ratio has surged sharply, reaching levels last seen in 2021. This metric, which reflects the ratio of borrowed capital and margin positions to the total value locked (TVL), has risen to 38%.
Declining TVL, Not Rising Loan Demand
It is important to understand that the current dynamics are not related to an increase in demand for borrowed funds. On the contrary, the main catalyst is the rapid contraction in the volume of locked assets. This spring, the sector faced a series of devastating hacker attacks that triggered a genuine crisis of confidence.
The most high-profile incidents affected the Kelp DAO protocol, which lost approximately $292 million due to a vulnerability, and the Drift Protocol, which also suffered a serious exploit. A massive capital exodus was inevitable: investors, fearing for the safety of their funds, began actively withdrawing their assets. As a result, the total value of collateral dropped sharply across many blockchain networks.
According to estimates, the April exploits led to an outflow of TVL of approximately $13 billion. Thus, the rise in the leverage ratio is not the result of active lending, but a consequence of the "compression" of the collateral asset base. Traders did not take out more loans, but the total mass of assets serving as collateral decreased significantly.
Ecosystem on the Brink: Risks of Cascading Liquidations
Even after a partial market stabilization, the volume of margin positions has not decreased. This paints an extremely alarming picture: the ecosystem retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, leading to an even deeper drawdown.
Cryptalist Analysis: The rise in leverage against a backdrop of falling TVL is a classic "red flag." The market has become more fragile than it appears. Until the sector fully recovers from the spring security crisis, any sharp price movement could provoke an avalanche of liquidations. Investors should exercise maximum caution and avoid excessive use of borrowed funds under current conditions.