Leverage in DeFi has soared to 2021 highs: what is driving this growth?
The decentralized finance (DeFi) sector is experiencing a paradoxical moment. The leverage ratio, reflecting the proportion of borrowed capital to the total value of locked assets, has surged sharply, reaching 38%. This brings us back to levels last seen in 2021.
At first glance, such a jump might seem like a sign of bullish sentiment and active borrowing to play the upside. However, the reality is far more alarming. The key driver of this growth is not an increase in demand for loans, but a rapid contraction in the total value locked (TVL) base.
This process was triggered by a wave of large-scale hacker attacks that hit DeFi protocols this spring. Particularly severe blows were dealt to platforms such as Kelp DAO, which lost about $292 million due to a vulnerability, and Drift Protocol. These incidents sparked panic among investors, who began massively withdrawing their funds, fearing for the safety of their capital.
The result is a collapse in TVL of approximately $13 billion. Meanwhile, the volume of margin positions, i.e., loans taken out, has remained virtually unchanged. Thus, the proportion changed not because traders started borrowing more, but because the "pie" of collateral assets shrank dramatically.
Even after some market stabilization, the volume of borrowed funds has not decreased. This means the DeFi ecosystem is currently in an extremely vulnerable position. Any further decline in cryptocurrency prices carries a high risk of triggering a chain reaction of forced liquidations, which could lead to an even larger collapse.
Analytical summary: The rise in leverage amid falling TVL is not a bullish signal, but a "red flag" of systemic risk. The market has not yet recovered from the spring security crisis, and the current situation resembles a fragile equilibrium that could be disrupted at any moment. Investors should exercise extreme caution.