Leverage in DeFi has surged to five-year highs, triggered by hacks and capital outflows.
The decentralized finance (DeFi) sector is experiencing a paradoxical situation: the leverage ratio has surged sharply, reaching levels last seen in 2021. However, unlike the bull market of that period, the current spike is driven not by rising demand for borrowed funds, but by a rapid contraction in the total base of locked assets.
My data analysis confirms: the on-chain ratio, reflecting the proportion of borrowed capital and margin positions to the total value of collateral, has risen to 38%. This is a warning signal that traditionally indicates growing systemic risks. But the root of the problem lies not in increased debt burden, but in a massive outflow of liquidity.
Spring wave of attacks as a catalyst
The decline in collateral volumes began in the spring, when the sector faced a series of devastating hacker attacks. Malicious actors inflicted colossal damage, draining funds from several key protocols. The most significant losses were suffered by:
- Kelp DAO — a vulnerability led to the loss of approximately $292 million.
- Drift Protocol — the platform also experienced a serious exploit.
These incidents sparked panic among investors, who began withdrawing capital en masse, fearing for the safety of their funds. The total value locked (TVL) dropped sharply across many blockchain networks. Estimates suggest that the April exploits triggered an outflow of TVL of approximately $13 billion.
Illusion of growth and real threat
It is important to understand: the change in proportions occurred solely due to the reduction in the collateral base. Traders did not take out more loans. On the contrary, the total asset base shrank significantly. Even after a local market stabilization, the volume of margin positions did not decrease. This means the ecosystem retains heightened sensitivity to potential liquidations.
Expert opinion: The current situation resembles a "powder keg." Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, leading to an even deeper correction. The sector has still not fully recovered from the spring security crisis, and the high proportion of borrowed funds against a low collateral base makes the system extremely vulnerable.