DeFi hacks have triggered a rise in leverage to 2021 levels
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the leverage ratio has surged sharply, returning to levels last seen five years ago. This trend is causing serious concern, as historically, such changes signal a rise in systemic risks.
However, the current dynamics are driven not by an increase in demand for borrowed funds, but by a rapid contraction in the total value locked (TVL). The ratio clearly demonstrates the relationship between attracted capital and margin positions relative to the total value of collateral. This indicator has now reached 38%, which is directly linked to a widespread outflow of liquidity.
Massive capital outflow after attacks
The decline in TVL began in the spring, when the sector faced a series of large-scale hacker attacks. Attackers withdrew colossal sums from various projects. The most serious damage was suffered by two major platforms:
- The Kelp DAO protocol lost approximately $292 million due to a vulnerability.
- The Drift Protocol project also underwent serious exploitation by hackers.
Following these incidents, investors began to massively withdraw capital, fearing for the safety of their savings. The total value of collateral dropped sharply across many blockchain networks. As a result, the change in proportions occurred due to a decline in the volume of the collateral base. Traders did not take out more loans, but the overall asset base significantly contracted.
Exploits in DeFi in April triggered an outflow of TVL of approximately $13 billion. It is important to note that even after a local stabilization of the market, the volumes of margin positions did not decrease. Thus, the ecosystem retains increased sensitivity to potential liquidations.
My expert opinion: The current situation is a "ticking time bomb." The increase in leverage against the backdrop of shrinking liquidity makes the market extremely vulnerable. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, leading to cascading liquidations and a crash. The sector has still not fully recovered from the spring security crisis, and this makes it extremely unstable in the short term.