ETH Moves 3%, Sending $36M in DeFi Positions Into Liquidation

A decline of roughly 3% in PT-reUSD triggered approximately $36.4 million in liquidations on Morpho on Tuesday, exposing the fragility of highly leveraged DeFi strategies.

The liquidations followed a large purchase of the related YT-reUSD token, which pushed PT-reUSD lower. The principal token had been used by borrowers on Morpho as collateral for leveraged loans.

Although a 3% price change is relatively common in crypto markets, the affected traders had positioned themselves with extremely small collateral buffers. That left their positions vulnerable to an otherwise modest market move.

PT-reUSD is a principal token issued through Pendle and connected to reUSD, a dollar-denominated yield-bearing asset. Pendle separates yield-generating assets into two tokens, dividing the principal claim from the yield component.

Because both tokens are tied to the same underlying asset, their values have an inverse relationship. When demand for the yield token increases, its implied value rises, while the principal token becomes cheaper to maintain the combined value of both claims.

That mechanism was behind Tuesday’s move. PeckShield reported that a wallet purchased a large quantity of YT-reUSD, pushing its implied annual yield to around 20%, before closing the position shortly afterward. The transaction activity caused PT-reUSD to fall by approximately 3%.

Leveraged Positions Turned a Small Move Into a Major Liquidation

The scale of the losses was amplified by the way some traders had structured their positions on Morpho.

Borrowers deposited PT-reUSD as collateral, borrowed USDC against it and used the borrowed funds to buy more PT-reUSD. They could then repeat the process, increasing their exposure with each cycle.

The strategy offered the potential for greater returns but steadily reduced the collateral cushion. Some positions had less than 3% of headroom before reaching the liquidation threshold.

When collateral falls below a protocol’s required level, the system can automatically sell the collateral to repay the outstanding debt. This means traders using high leverage can see their positions closed after relatively small price declines.

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

Morpho’s Oracle Determined the Relevant Price

The oracle used by Morpho to price PT-reUSD was central to the liquidation process.

Lending protocols rely on oracles to determine collateral values and assess whether loans remain adequately backed. Morpho’s oracle selected the lower of PT-reUSD’s 15-minute average market price or a predefined price curve that gradually approached $1 as the token moved toward maturity.

The maturity curve effectively limited the maximum value assigned to PT-reUSD based on its expected progression toward $1. Once the market price moved below that curve, the 15-minute average became the lower figure and was used for collateral calculations.

Pendle said the oracle had been correctly configured and behaved as intended.

Steakhouse Financial, which curates lending markets that support PT-reUSD as collateral, said its vault lenders were not harmed and that the liquidations did not produce bad debt. The collateral sold during the liquidations generated enough funds to repay the loans.

Steakhouse temporarily withdrew liquidity from the affected markets while investigating the incident and later began restoring the capital.

The underlying reUSD asset itself remained unaffected, according to Steakhouse.