Leverage in DeFi has soared to 2021 highs amid a security crisis
The decentralized finance (DeFi) sector is experiencing a paradoxical moment. The on-chain leverage ratio, which reflects the ratio of borrowed capital to the total value locked (TVL), has surged sharply, reaching 38%. This brings us back to levels last seen in 2021. However, behind this growth lies not an increase in loan demand, but an alarming factor — a rapid contraction of the locked asset base itself.
The reason for this imbalance is a wave of large-scale hacker attacks that swept through the industry this spring. Attackers dealt devastating blows to key protocols, triggering a massive capital outflow from frightened investors.
Epicenter of the crisis: billion-dollar losses
The most severe consequences were recorded on two platforms. The restaking protocol Kelp DAO lost approximately $292 million due to a critical vulnerability. The Drift Protocol project also suffered a large-scale exploit. These incidents triggered panic: users rushed to withdraw funds, fearing for the safety of their savings.
By my estimates, the total TVL on the Ethereum network and several other blockchains has shrunk by about $13 billion. As a result, the denominator of the fraction (total collateral value) has sharply decreased, while the numerator (volume of margin positions) has remained virtually unchanged. Traders did not take out more loans — the asset base against which these loans were issued simply "shrank."
Fragile equilibrium
The market is now in an extremely vulnerable position. Even after a local stabilization, the volumes of margin positions have not decreased. This means the system retains heightened sensitivity to further price movements. Any new drop in cryptocurrency prices could trigger a cascade of forced liquidations.
Analytical conclusion: The current situation is a classic example of a "false signal." The rise in leverage does not indicate a bullish market sentiment, but is a consequence of a crisis of confidence and shrinking liquidity. Until the sector recovers from the spring security attacks, this elevated level of risk will hang like a sword of Damocles over the entire DeFi ecosystem. Investors should be extremely cautious.