A price decline of roughly 3% in PT-reUSD triggered approximately $36.4 million in liquidations on the Morpho lending platform Tuesday, exposing the risks of highly leveraged DeFi strategies.
The sharp liquidation wave followed a large trade in a related Pendle market that reduced the value of PT-reUSD, which several borrowers were using as collateral.
A 3% move would normally be considered relatively small in cryptocurrency markets. However, the affected traders had built leveraged positions with such narrow safety margins that the decline was enough to force their positions into liquidation.
PT-reUSD is a principal token issued through Pendle and linked to reUSD, a dollar-based asset that generates yield. Pendle separates yield-bearing assets into two components: a principal token and a yield token.
The two tokens are closely connected because they represent different claims on the same underlying asset. When demand for the yield token increases, its value rises while the principal token becomes cheaper, keeping the combined value aligned with the underlying asset.
That mechanism was at the center of Tuesday’s move. PeckShield reported that a wallet accumulated a large amount of YT-reUSD, pushing the implied annual yield to around 20%. The wallet then exited the position soon afterward, while the buying activity caused PT-reUSD to decline by approximately 3%.
Leverage Turned a Small Price Move Into Major Liquidations
The price decline became significant because of how traders were using PT-reUSD on Morpho.
Some borrowers deposited the token as collateral, borrowed USDC against it and used the borrowed stablecoins to purchase additional PT-reUSD. They then repeated the process, creating a leveraged loop that increased potential returns while leaving progressively less protection against a price decline.
According to the reported positioning, some of these borrowers had less than 3% of collateral buffer remaining before their loans became subject to automatic liquidation.
When collateral falls below a protocol’s required threshold, the platform can sell it automatically to repay the outstanding debt. As a result, even a modest decline in collateral can completely unwind a highly leveraged position.
Pendle had not immediately responded to a CoinDesk request for comment sent through Telegram.
Morpho’s Oracle Helped Determine the Liquidation Trigger
The value assigned to PT-reUSD by Morpho’s oracle played an important role in determining which positions would be liquidated.
An oracle supplies lending protocols with asset prices so they can calculate collateral values and determine whether loans remain adequately backed.
In this case, the oracle used the lower of two figures: the token’s 15-minute average market price or a predetermined price curve that gradually moved toward $1 as PT-reUSD approached maturity.
The scheduled curve effectively limited how high the token could be valued based on its expected path to $1 at maturity. Once PT-reUSD’s market price fell beneath that curve, the 15-minute average became the lower value and was used by the oracle.
Pendle said the oracle had been set up correctly and performed according to its intended design.
Steakhouse Financial, which helps manage and curate lending markets where PT-reUSD can be used as collateral, said its vault lenders suffered no losses. The liquidations generated enough proceeds to repay the associated loans, meaning no bad debt was created.
Steakhouse temporarily removed capital from the affected markets while investigating the incident and later began returning funds.
The underlying reUSD asset itself remained stable and was not affected by the liquidation event, according to Steakhouse.
