Leverage in DeFi has soared to 2021 highs: what's the reason?
The decentralized finance (DeFi) sector is experiencing a paradoxical moment: the leverage ratio has surged sharply, reaching levels last seen in 2021. However, unlike the bull market of that time, the current dynamics are of a completely different nature. This is not a growth in demand for borrowed funds, but an alarming signal linked to a contraction in the overall base of locked assets.
The Growth Paradox: Falling TVL as the Main Catalyst
The leverage ratio, which reflects the ratio of borrowed capital and margin positions to the total value locked (TVL), has soared to 38%. At first glance, this might indicate an increased propensity for risk. However, the reality is that the volume of borrowing has not increased. The key factor has been a sharp decline in TVL, caused by a series of major hacks and exploits that hit the ecosystem this spring.
The most notable incidents occurred on the Kelp DAO and Drift Protocol platforms, where attackers withdrew enormous sums. As a result, investors, fearing for the safety of their capital, began a mass withdrawal of assets. According to analysts, the outflow of TVL due to hacks in April alone amounted to approximately $13 billion.
Risk of Cascading Liquidations Remains High
It is important to understand that the current situation is extremely unstable. The reduction in collateral mass while maintaining the volume of margin positions makes the system highly sensitive to any market movement. Even after some stabilization, lending volumes have not decreased, creating the conditions for a potential chain reaction of forced liquidations in the event of further declines in cryptocurrency prices.
My analysis: We are witnessing a classic scenario of a "fragile equilibrium." The market has not recovered from the spring security crisis, and the high leverage ratio is not a sign of strength, but an indicator of vulnerability. Any significant price movement could trigger avalanche-like liquidations, the likes of which we have not seen since the crash of 2022. Investors should exercise extreme caution and reconsider their risk management strategies in DeFi.