Galaxy Digital: The rise in leverage in the crypto market has led to increased market vulnerability.

On August 18, according to a report by Coindesk, Galaxy Research reported that the scale of loans in the crypto market grew by 27% in Q2, reaching $53.1 billion, the highest level since early 2022, mainly driven by DeFi lending demand and a rebound in risk appetite. Bitcoin fell from $124,000 to $118,000, triggering over $1 billion in liquidations in the crypto derivatives market, the largest liquidation of long positions since early August. Analysts believe this is more like a healthy profit-taking rather than the beginning of a reversal, but it also highlights the market's vulnerability when leverage accumulates quickly. Galaxy analysts pointed out that pressure points have begun to appear. In July, Aave saw a massive amount of withdrawals, pushing ETH lending rates above Ethereum staking yields, breaking the logic of "circular arbitrage"—using staked ETH as collateral to borrow more ETH. This deleveraging process triggered a bank run on staking positions, causing the exit queue of the Ethereum beacon chain to set a historic record of 13 days. Galaxy stated that since July, the borrowing cost of USDC in the over-the-counter market has continued to rise, while on-chain lending rates have remained stable. The spread between the two has widened to the highest level since the end of 2024. This divergence indicates that the off-chain demand for USD has exceeded the on-chain liquidity, which could exacerbate fluctuations if market conditions tighten further. With an explosion in loan volumes, concentrated borrowing power, tightening DeFi liquidity, and an expanding gap between the on-chain and off-chain USD markets, the system is showing more pressure points. Thursday's $1 billion liquidation serves as a reminder that the impact of leverage is two-fold.