Galaxy Digital: The rapid growth of leverage in the crypto market has led to increased market vulnerability

ChainCatcher news, according to Coindesk, a report from Galaxy Research shows that the crypto market's Q2 lending volume increased by 27%, reaching $53.1 billion, the highest level since early 2022, primarily driven by demand for DeFi lending 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, marking the largest scale of long liquidations 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 rapidly.

Galaxy analysts pointed out that pressure points have begun to emerge. In July, Aave experienced a large number of withdrawals, pushing ETH lending rates above Ethereum staking yields, breaking the "circular arbitrage" trading logic—using staked ETH as collateral to borrow more ETH. This deleveraging process triggered a run on staking positions, causing the exit queue for the Ethereum beacon chain to set a historical record of 13 days.

Galaxy stated that since July, the borrowing costs for USDC in the over-the-counter market have 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 off-chain demand for dollars has exceeded on-chain liquidity, which could exacerbate volatility if market conditions tighten further. With a surge in loan volume, concentrated borrowing power, tightening DeFi liquidity, and an expanding gap between on-chain and off-chain dollar markets, the system is showing more pressure points. The $1 billion liquidation on Thursday serves as a reminder that the effects of leverage are two-sided.