A roughly 3% decline in PT-reUSD was enough to trigger around $36.4 million in liquidations on Morpho on Tuesday, highlighting how tightly leveraged DeFi positions can unravel after relatively small market moves.
The liquidations followed a large trade involving the related yield token YT-reUSD, which pushed down the price of PT-reUSD that borrowers had deposited as collateral.
A move of this size is not unusual for crypto markets. However, the traders affected by the event had built positions with extremely limited room for price fluctuations, leaving them vulnerable to even a modest decline.
PT-reUSD is a principal token created through Pendle and tied to reUSD, a dollar-denominated asset that generates yield. Pendle divides yield-bearing assets into two components: principal tokens and yield tokens.
Because both tokens represent different portions of the same underlying asset, their prices tend to move in opposite directions. When demand for the yield token rises, its implied value increases, forcing the principal token to become cheaper so the two claims continue to correspond with the value of the underlying asset.
That relationship drove Tuesday’s move. Blockchain security firm PeckShield said a wallet purchased a large amount of YT-reUSD, pushing its implied annual yield to roughly 20%, before selling the position shortly afterward. The buying pressure contributed to a decline of around 3% in PT-reUSD.
Leveraged Borrowing Magnified the Impact
The sharp rise in liquidations was tied to how some traders had used PT-reUSD on Morpho.
Borrowers had deposited PT-reUSD as collateral, borrowed USDC against it and used the borrowed funds to acquire more PT-reUSD. By repeating the cycle, they increased their exposure and potential returns while reducing the amount of collateral cushion protecting their positions.
Some of these leveraged positions reportedly had less than 3% of remaining headroom before reaching Morpho’s liquidation threshold.
Once collateral falls below the required level, the lending protocol can automatically sell it to cover the borrower’s debt. That means even a relatively small price decline can force highly leveraged positions to close.
Pendle did not immediately provide a response to a CoinDesk request for comment sent through Telegram.
Oracle Pricing Set the Collateral Value
The oracle used by Morpho to value PT-reUSD was another important part of the liquidation process.
Oracles supply lending protocols with asset prices, allowing them to calculate collateral ratios and determine when a borrower’s position has become unsafe.
Morpho’s oracle used whichever was lower between PT-reUSD’s 15-minute average market price and a predetermined price curve that gradually approached $1 as the token moved toward maturity.
The maturity-based curve effectively limited PT-reUSD’s valuation according to its expected path toward $1. When the market price dropped below that curve, the 15-minute average became the lower value and was used to determine collateral levels.
Pendle said the oracle configuration was correct and that it operated as intended.
Steakhouse Financial, which curates lending markets that accept PT-reUSD as collateral, said its vault lenders were not exposed to losses. The liquidations produced sufficient proceeds to repay the associated loans, preventing the creation of bad debt.
Steakhouse temporarily withdrew liquidity from the affected markets while reviewing the incident before gradually redeploying funds.
According to Steakhouse, the underlying reUSD asset itself remained unaffected by the liquidation event.
