Ethereum’s 3% Price Swing Wipes Out $36M Across DeFi Positions

A roughly 3% price decline triggered about $36.4 million in liquidations on the Morpho lending platform Tuesday after a large trade in a related Pendle market pushed down the value of collateral used by borrowers.

The market move itself was relatively modest by crypto standards, but it exposed highly leveraged positions that had very little room to withstand a sudden drop in collateral value.

The collateral involved was PT-reUSD, a token issued through Pendle and linked to reUSD, a dollar-denominated asset that generates yield for holders. Pendle allows users to separate an interest-bearing asset into two distinct tokens: a principal token and a yield token.

These two tokens have an inverse relationship because they represent claims on the same underlying asset. When demand for the yield component increases, its implied value rises, while the principal token becomes cheaper to keep the combined value aligned with the underlying asset.

That dynamic played out in the latest incident. Blockchain security firm PeckShield reported that a wallet purchased a significant amount of YT-reUSD, pushing the implied annual yield to about 20%, before exiting the position shortly afterward. The buying pressure caused PT-reUSD to fall roughly 3%.

Leveraged PT-reUSD Positions Amplified the Move

The larger problem came from the strategies traders had constructed using PT-reUSD as collateral.

Some borrowers deposited PT-reUSD on Morpho, borrowed USDC against the collateral, used the borrowed funds to purchase additional PT-reUSD and then repeated the process. Each cycle increased the potential return but also reduced the buffer protecting the position.

Traders using this leveraged strategy had less than 3% of remaining collateral headroom before their positions became eligible for automatic liquidation.

When collateral falls below a platform’s required threshold, the lending protocol can sell the assets automatically to recover the outstanding loan. That mechanism means even a relatively small decline can wipe out a highly leveraged position.

Pendle did not immediately respond to a CoinDesk request for comment sent through Telegram.

Oracle Pricing Played a Central Role

The liquidation process depended on the oracle used by Morpho to determine the value of PT-reUSD. Oracles provide lending protocols with price information that is used to assess collateral and determine whether positions remain sufficiently backed.

Morpho’s oracle selected the lower of two values: PT-reUSD’s average market price over the previous 15 minutes or a predetermined price curve that gradually approached $1 as the token moved toward maturity.

The scheduled price curve effectively placed an upper limit on PT-reUSD’s valuation based on its expected path toward $1 at maturity. Once the market price dropped below that curve, the 15-minute average became the lower figure and was used for collateral valuation.

Pendle said the oracle had been configured properly and operated according to its intended design.

Steakhouse Financial, which helps curate lending markets that accept PT-reUSD as collateral, said its vault lenders were not affected and that the liquidations did not result in bad debt. In other words, the liquidated collateral generated enough proceeds to cover the borrowers’ outstanding loans.

Steakhouse temporarily withdrew funds from the affected markets while reviewing the incident before beginning to redeploy capital.

The underlying reUSD asset itself was not impacted by the episode, according to Steakhouse.

About The Author

ctleditor

See author's posts