Leverage in DeFi has soared to 2021 highs: what is the real reason
The decentralized finance sector has once again come into the spotlight: the leverage ratio has surged sharply, returning to levels seen five years ago. At first glance, this might appear to be a sign of bullish sentiment and increased risk appetite, but the reality, as always, is more complex.
My analysis shows that the current dynamics are not a result of increased demand for borrowed funds. On the contrary, the trigger was a rapid outflow of total value locked (TVL). The spring wave of large-scale hacker attacks undermined investor confidence, sparking a mass withdrawal of capital.
The most painful blows hit two major protocols: Kelp DAO lost about $292 million due to a critical vulnerability, and Drift Protocol also suffered a serious exploit. Investors, fearing for the safety of their funds, began to panic-withdraw liquidity, leading to a sharp reduction in the overall base of collateral assets.
As a result, the share of margin positions relative to the reduced collateral volume soared to 38%. Traders did not take out more loans — the "pie" simply became smaller. As noted in industry reports, the April exploits triggered an outflow of TVL of approximately $13 billion.
Fragile Equilibrium: Risks of Cascading Liquidations
Even after a partial market stabilization, the volumes of margin positions have not decreased. This means the ecosystem remains highly sensitive to any price fluctuations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures.
My expert assessment: What we are seeing now is not healthy growth, but a dangerous imbalance. The sector has not yet recovered from the spring security crisis, and the current leverage level is a ticking time bomb. Investors should exercise extreme caution, especially when working with protocols where the ratio of borrowed funds to equity is critically high.