The DeFi leverage ratio has soared to 2021 highs: what is the reason?
A worrying signal has been recorded in the decentralized finance (DeFi) sector: the on-chain leverage ratio has returned to levels seen five years ago. This indicator currently stands at 38%, directly correlating with the levels of the active bull market in 2021. However, the current dynamics are fundamentally different in nature.
Contrary to expectations, the increase in the share of borrowed capital relative to the total value locked (TVL) is not driven by rising demand for loans, but by a rapid contraction of the collateral base itself. Investors are massively withdrawing funds, fearing for the safety of their savings after a series of high-profile hacks.
Epidemic of hacks triggers capital flight
This spring has been marked by a series of large-scale cyberattacks on DeFi protocols. Two major platforms suffered the most serious damage: Kelp DAO, which lost approximately $292 million due to a critical vulnerability, and Drift Protocol, which also faced severe exploitation by hackers.
These incidents sparked panic. Depositors began massively withdrawing liquidity, leading to a sharp decline in total TVL. According to analysts' estimates, capital outflows from the DeFi ecosystem amounted to around $13 billion in April alone. The result was a paradoxical shift in proportions: the volume of margin positions remained at the same level, while the total collateral base significantly decreased.
Experts emphasize that even after a local stabilization of the market, the volume of borrowed funds has not decreased. This means the ecosystem retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures. The situation currently appears extremely unstable, as the sector has not yet fully recovered from the spring security crisis.
Expert opinion: The rise in the leverage ratio amid a falling TVL is a classic sign of system "fragility." We are observing not healthy demand for leverage, but a shrinking asset base while risky positions are maintained. This makes the market highly vulnerable to sudden price shocks. Investors should closely monitor liquidation levels in the largest protocols.