DeFi leverage has soared to 2021 highs: what is the real reason?
The decentralized finance (DeFi) sector is experiencing a paradoxical moment. The leverage ratio — the ratio of borrowed capital and margin positions to the total value locked (TVL) — has surged sharply, reaching levels last seen in 2021. At first glance, this might appear to be a sign of bullish activity, but the reality is far more alarming.
My analysis shows that the current spike is not the result of aggressive debt accumulation by traders. On the contrary, the driving force has been the rapid contraction of the collateral base itself. Since the beginning of spring 2025, the industry has faced a wave of devastating hacks that forced investors to withdraw funds in panic.
Hacks as a Catalyst for Contraction
The spring series of attacks dealt a crushing blow to confidence. Two major protocols suffered the most painful losses:
- Kelp DAO — a vulnerability led to losses of approximately $292 million.
- Drift Protocol — also faced serious exploitation by malicious actors.
These incidents triggered a massive capital outflow. According to my estimates, the total TVL across the network decreased by roughly $13 billion. However, the volume of open margin positions remained virtually unchanged.
It is precisely this that created a "compressed spring" effect: the denominator of the ratio (total collateral value) sharply decreased, while the numerator (borrowed funds) stayed in place. As a result, the ratio jumped to 38%.
Fragile Equilibrium
Experts at Binance Research rightly note that even after some market stabilization, the volumes of margin positions have not declined. This means the ecosystem retains heightened sensitivity to potential liquidations.
The situation remains extremely unstable. The sector has not yet fully recovered from the spring security crisis. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, potentially sparking a new wave of sell-offs.
Cryptalist Expert Opinion: The rise in leverage amid falling TVL is a classic "bearish" signal, not a sign of market health. Investors should exercise maximum caution: the current market configuration resembles an overheated steam boiler, where the slightest price movement could lead to a sharp release of pressure.