The DeFi leverage ratio has soared to 2021 levels: what is driving this growth
The decentralized finance (DeFi) sector is recording a sharp spike in the on-chain leverage ratio, which has returned to levels seen five years ago. Analytical data confirms this trend: on one hand, such changes traditionally signal an increase in systemic risks, but on the other, the current dynamics are driven by a specific factor—namely, a rapid decline in the total value locked, rather than a rise in demand for borrowed funds.
Why DeFi leverage has returned to 2021 levels
The ratio clearly demonstrates the relationship between borrowed capital and margin positions relative to the total value of locked assets. Currently, this indicator has risen to 38%, driven by a widespread drop in collateral volumes.
The decline began in the spring, when the sector faced a series of large-scale hacker attacks. Attackers withdrew colossal sums from various projects. The most significant damage was suffered by two major platforms:
- The Kelp DAO protocol lost approximately $292 million due to a vulnerability.
- The Drift Protocol project also experienced serious exploitation by hackers.
Following these incidents, investors began to massively withdraw capital, fearing for the safety of their savings. Consequently, the total value of collateral sharply declined across many blockchain networks.
"Exploits in DeFi in April triggered an outflow of TVL of about $13 billion," the report notes.
As a result, the change in proportions occurred due to a drop in the collateral base. Traders did not take out more loans, but the overall asset base significantly contracted.
Experts emphasize that even after a local market stabilization, the volumes of margin positions did not decrease. Thus, the ecosystem retains increased sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures. The situation currently appears unstable, as the sector has not fully recovered from the spring security crisis.
My professional commentary: The rise in the leverage ratio amid a falling TVL is a warning sign for the market. Unlike in 2021, when high leverage was fueled by bullish sentiment, today we are seeing a "fragile" increase based on a shrinking asset base. This makes DeFi extremely vulnerable to cascading liquidations at the slightest downward price movement. Investors should reconsider their risk management strategies in the current conditions.