Leverage in DeFi has soared to 2021 highs: hacker attacks served as the trigger
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the leverage ratio has sharply surged to levels last seen in 2021. At first glance, this could signal a return of bullish sentiment and increased risk appetite. However, as my analysis shows, the reality is far more alarming. The driver of this growth is not an increase in demand for borrowed funds, but a rapid contraction in the total base of locked assets.
Mechanism of Growth: Falling TVL, Not Rising Borrowing
The leverage ratio is the ratio of the volume of attracted capital and margin positions to the total value locked (TVL). This indicator has now reached 38%. The reason is not that traders have become more active in taking out loans, but that TVL has sharply declined. This spring, the sector faced a series of large-scale hacker attacks that triggered a massive outflow of capital.
The most significant losses were incurred by two major platforms:
- The Kelp DAO protocol lost about $292 million due to an exploited vulnerability.
- The Drift Protocol project also suffered a serious attack from malicious actors.
As a result of these incidents, investors, fearing for the safety of their funds, began to withdraw capital en masse. According to estimates, the total outflow of TVL from the DeFi ecosystem amounted to about $13 billion. Thus, the denominator in the equation sharply decreased, while the numerator (the volume of margin positions) remained virtually unchanged.
Risk of Cascading Liquidations: System on the Brink
Experts note that even after the local stabilization of the market, the volume of margin positions has not decreased. This means the ecosystem retains increased sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures.
My Expert Opinion: The current situation in DeFi is extremely unstable. The rise in leverage is not a sign of market health, but an alarming signal. The system has not yet fully recovered from the spring security crisis, and any negative external shock could provoke a massive wave of liquidations. Investors should now exercise maximum caution and avoid excessive use of borrowed funds.