DeFi hacks have triggered a rise in leverage to 2021 levels
The decentralized finance (DeFi) sector has once again come into focus: the on-chain leverage ratio has made a sharp jump, returning to levels last seen in 2021. According to my analysis, the current dynamics are fundamentally different from those during the peak of the last bull cycle.
At first glance, the rise in the leverage ratio to 38% signals an increased appetite for risk. However, a detailed analysis reveals a different picture: this surge is driven not by an increase in borrowing volumes, but by a rapid decline in the total value locked (TVL). In other words, the denominator of the fraction has decreased faster than the numerator.
Spring wave of hacks as a catalyst
The reason for such a sharp drop in TVL lies in a series of large-scale hacker attacks that swept through DeFi this spring. Attackers dealt devastating blows to key protocols, withdrawing colossal amounts of funds. The most notable incidents were the hack of the Kelp DAO protocol, which lost about $292 million, and a serious exploitation of a vulnerability in Drift Protocol.
These events triggered panic among investors, who began to massively withdraw their funds from liquidity pools. As a result, the aggregate TVL in many blockchain networks collapsed sharply, decreasing by an estimated $13 billion. It is this contraction of the asset base, not an increase in borrowing activity, that led to the anomalous rise in the leverage ratio.
Hidden threat to the market
Analysts emphasize that, despite the local stabilization of the market, the volumes of margin positions have not decreased. This means the ecosystem retains heightened sensitivity to potential liquidations. The situation remains extremely unstable: any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures, exacerbating the downward trend.
My expert opinion: The rise in leverage against the backdrop of falling TVL is a classic "bearish" signal masquerading as a bullish one. The market has become more fragile than it appears. Until the sector fully recovers from the spring security crisis, any negative news flow could become a trigger for large-scale cascading liquidations, making current levels extremely dangerous for careless traders.