DeFi leverage has soared to 2021 peaks: what lies behind the alarming signal
The decentralized finance (DeFi) sector is showing a sharp spike in its on-chain leverage ratio, which has returned to levels not seen since 2021. This is not just a statistical anomaly — such dynamics traditionally signal growing systemic risks and increased vulnerability within the ecosystem.
Not Demand, but a Shrinking Base
The key factor behind the current growth is not an increase in borrowed volumes, but a rapid decline in total value locked (TVL). The ratio, which reflects the proportion of borrowed capital and margin positions to the total collateral volume, has risen to 38%. This occurred against the backdrop of a massive capital outflow triggered by a series of large-scale hacks.
In the spring, the sector faced serious security incidents. The most significant losses were suffered by the Kelp DAO protocol (approximately $292 million) and the Drift Protocol project. These attacks sparked panic among investors, who began withdrawing funds en masse, fearing for the safety of their assets.
The Domino Effect: How Hacks Changed Market Structure
According to my estimates, the total outflow of TVL from DeFi protocols in April amounted to about $13 billion. This led to a paradoxical situation: traders did not take out more loans, but the overall asset base (collateral) shrank significantly. As a result, the proportion shifted, and the share of borrowed funds in the system rose sharply.
Even after a partial market stabilization, the volumes of margin positions have 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.
My analysis: The situation resembles a taut string. The sector has still not fully recovered from the spring security crisis, and the current leverage level makes it extremely vulnerable to external shocks. Investors should exercise increased caution — the market is in a zone of high volatility, and the risk of cascading liquidations remains significant.