A roughly 3% decline in PT-reUSD triggered approximately $36.4 million in liquidations on the Morpho lending protocol Tuesday, after a single wallet's large trade in a related Pendle market set off a cascade of automated position closures across Ethereum DeFi.
Market Context
The liquidation event unfolded against a backdrop of heightened activity in yield-splitting protocols. Pendle allows holders of interest-bearing assets to divide them into separate principal and yield tokens that trade independently, creating complex interdependencies where movements in one token directly impact the other.
PT-reUSD represents the principal portion of reUSD, a dollar-denominated asset issued by Restake Finance that accrues interest over time. When demand surges for the corresponding yield token YT-reUSD, PT-reUSD must decline to maintain the mathematical relationship between the two split components.
Analysis
Blockchain security firm PeckShield identified one wallet responsible for initiating the cascade. The entity accumulated a substantial position in YT-reUSD, driving the implied annual yield on reUSD up to 20% before quickly exiting the trade. This buying pressure simultaneously pushed PT-reUSD lower by approximately 3%.
The timing proved devastating for leveraged borrowers who had constructed positions using PT-reUSD as collateral. These traders repeatedly deposited PT-reUSD on Morpho, borrowed USDC against it, used those proceeds to purchase additional PT-reUSD, and cycled through the process multiple times. Each iteration amplified potential returns while compressing liquidation margins.
Borrowers utilizing this strategy left themselves less than 3% of headroom before positions would be automatically closed by the protocol when collateral values dropped below predefined thresholds. The oracle feed that Morpho relied upon calculated collateral worth using whichever figure was lower between PT-reUSD's 15-minute average trading price and a fixed schedule approaching $1 at maturity.
When market activity pushed PT-reUSD below the maturity-implied curve, the spot average became operative, triggering the cascade of liquidations for undercollateralized positions. Morpho's system automatically sold collateral to repay loans without borrower intervention once thresholds were breached.
Pendle maintained that its price feed functioned as designed. Steakhouse Financial, which curates lending markets accepting PT-reUSD as collateral, reported that lenders in its vaults experienced no losses and no bad debt emerged from the episode. The protocol withdrew funds temporarily while reviewing the incident before redeploying capital.
The underlying reUSD asset remained unaffected throughout the liquidation event, according to Steakhouse.
Key Numbers
- $36.4 million: Total liquidations triggered on Morpho
- 3%: Magnitude of PT-reUSD decline that initiated cascade
- ~20%: Implied annual yield reached in YT-reUSD before selloff
- <3%: Liquidation buffer remaining for affected leveraged borrowers
- 15 minutes: Oracle averaging window used for price determination
What to Watch
Monitor whether Steakhouse Financial implements stricter collateralization requirements or position limits for PT-reUSD markets following the incident. The episode highlights systemic risk when yield-splitting mechanics interact with leveraged lending strategies, and protocols may reassess how they handle correlated token pairs as collateral. Traders running similar loop strategies across other Pendle markets should evaluate their liquidation buffers given this precedent.
Watch for any response from Pendle regarding oracle configuration changes or communication improvements around price feed behavior during periods of elevated YT token activity.