DeFi hacks have triggered a sharp increase in leverage: the sector has returned to 2021 levels
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the leverage ratio, reflecting the proportion of borrowed capital to the total value of locked assets, has surged to 38%. This brings us back to levels characteristic of the peak of the previous bull cycle in 2021. However, unlike that period, the current increase is driven not by rising demand for borrowed funds, but by a dramatic reduction in the underlying collateral base.
The cause is not risk appetite, but capital flight
The key catalyst for this movement is a series of devastating hacks that swept through the ecosystem in the spring. Analyzing the dynamics, we see that investors began withdrawing funds in panic, fearing for the safety of their assets. A particularly heavy blow fell on the Kelp DAO and Drift Protocol protocols, which suffered colossal losses — approximately $292 million and significant sums, respectively. These incidents triggered a massive capital outflow: estimates suggest the total Total Value Locked (TVL) decreased by roughly $13 billion.
As a result, the denominator of the fraction — the total value of the collateral base — sharply decreased, while the numerator (the volume of margin positions) remained virtually unchanged. Traders did not take out more loans; the base of assets against which these loans were issued simply contracted significantly. This mechanically drove the ratio higher.
Heightened sensitivity to liquidations
The current situation is extremely unstable. Despite some local market stabilization, the volume of open margin positions has not decreased. This means the system retains heightened sensitivity to any further decline in cryptocurrency prices. Even a moderate price drop could trigger a chain reaction of forced liquidations, potentially leading to a new wave of volatility and decline.
Expert opinion: The market has found itself in a trap: on one hand, the reduction in TVL lowers overall liquidity; on the other, high leverage makes it vulnerable to cascading liquidations. Restoring trust after the spring hacks is a key factor for normalizing the situation. Until the sector demonstrates resilience to attacks, we will continue to observe this fragile and dangerous dynamic.