Leverage in DeFi has surged to 2021 highs: what is the real reason?
The decentralized finance (DeFi) sector is once again in the spotlight: the leverage ratio has surged sharply, reaching levels last seen in 2021. At first glance, this might appear to be a sign of bullish sentiment and active borrowing. However, upon detailed analysis, the picture is far more alarming.
The current spike in the on-chain ratio, which reflects the proportion of borrowed capital and margin positions to the total value locked (TVL), has nothing to do with growing demand for loans. Instead, the driving force has been a rapid contraction in the overall collateral base. Simply put, traders have not borrowed more — the volume of collateral assets in the system has simply plummeted.
Spring wave of hacks triggered capital flight
The catalyst for this process was a series of large-scale hacker attacks that hit DeFi this spring. Attackers dealt devastating blows to key protocols. The most notable incidents include:
- Kelp DAO — losses amounted to approximately $292 million due to a critical vulnerability.
- Drift Protocol — the platform suffered a serious exploitation by hackers.
These events sparked panic among investors. Fearing for the safety of their funds, users began to withdraw capital en masse. The total value locked (TVL) dropped sharply across virtually all blockchain networks. Estimates suggest that April's exploits alone led to an outflow of roughly $13 billion.
As a result, the proportions changed dramatically: with the volume of margin positions remaining unchanged or even slightly reduced, the denominator of the ratio (total collateral value) decreased, pushing the ratio to five-year highs — up to 38%.
Expert analysis: system on the brink
It is important to understand that even after some market stabilization, the volume of margin positions has not declined. This means the ecosystem retains heightened sensitivity to potential liquidations. Any further drop in cryptocurrency prices could trigger a chain reaction of forced position closures.
My professional opinion: The current situation is a classic "quiet storm." The DeFi sector has not yet fully recovered from the spring security crisis. A high leverage ratio combined with low TVL is not a sign of strength, but a marker of extreme vulnerability. The market is in a fragile equilibrium, and the slightest negative trigger could provoke a massive wave of liquidations, comparable to the events of "Black Thursday" in 2020. Investors should now exercise maximum caution and avoid excessive risk.