DeFi leverage has returned to 2021 levels: what is behind this surge?
The decentralized finance (DeFi) sector is once again showing alarming dynamics: the leverage ratio has surged sharply, returning to levels last seen in 2021. This spike is not a sign of healthy market growth, but rather a warning signal indicating fundamental changes in the capital structure.
The root of the problem lies in liquidity outflows, not increased borrowing
Analysis of the current situation shows that the main driver of this growth has been a rapid decline in total value locked (TVL), rather than an increase in demand for borrowed funds. The ratio reflecting borrowed capital and margin positions relative to the total value of collateral has jumped to 38%. This has occurred against the backdrop of massive capital outflows triggered by a series of major hacks.
The most devastating incidents involved the Kelp DAO protocol, which lost approximately $292 million, and the Drift Protocol project, which also suffered a serious exploit. These events caused panic among investors, who began withdrawing capital en masse, fearing for the safety of their assets. As a result, the total value of collateral has sharply declined across many blockchain networks.
By my estimates, the April hacks triggered an outflow of TVL of about $13 billion. This is a colossal figure that instantly altered the proportions within the system. Traders did not take out more loans—on the contrary, the base of assets used as collateral has significantly shrunk.
Systemic vulnerability persists
Even after some market stabilization, the volume of margin positions has not decreased. This means the ecosystem retains heightened sensitivity to potential liquidations. Any further decline in cryptocurrency prices could trigger a chain reaction of forced position closures.
The situation remains extremely unstable. The sector has still not fully recovered from the spring security crisis. The rise in leverage amid the contraction of TVL is not a sign of market confidence, but rather an indicator of the fragility of the current structure. Investors should exercise increased caution, as current leverage levels carry hidden risks that could materialize at the slightest negative market movement.