A 3% token move just triggered $36 million in Ethereum DeFi liquidations

A price move of roughly 3% triggered about $36.4 million of liquidations on the lending platform Morpho early Tuesday, after one wallet’s trade in a related market moved the value of what borrowers had put up as security.

Move of such a percentage are ordinary in crypto, but the borrowers who lost their positions had built strategies that could not survive one.

The collateral was PT-reUSD, a token issued on Pendle and tied to reUSD, a dollar-denominated asset that pays interest to holders. Pendle lets holders split an interest-paying asset into two separate tokens.

One, called the principal token or PT, is a claim on the original money, redeemable for a dollar’s worth at a set date, in this case Dec. 10. The other, the yield token or YT, collects the interest earned between now and then.

The two behave like a seesaw. Both are carved out of the same asset, so their prices have to add up to the whole. When buyers pile into the yield side, they are effectively bidding up the interest, and the principal side has to get cheaper to compensate.

That is what happened. Blockchain security firm PeckShield said one wallet bought a large amount of YT-reUSD, driving the implied annual yield up to 20%, then sold out of the position shortly afterwards. The buying pushed PT-reUSD down by about 3%.

The trouble was in what other people had built on top of that token. Some traders had deposited PT-reUSD on Morpho, borrowed the stablecoin USDC against it, bought more PT-reUSD with the borrowed money and repeated the loop. Each round increased the potential return and shrunk the margin for error, and borrowers running this trade had left themselves less than 3% of headroom before their loans would be closed out automatically.

Pendle did not immediate respond to a CoinDesk request for comment on Telegram.

When collateral drops below a set level, the platform sells it to repay the loan without asking the borrower, which is why a small move can end a position outright.

The price Morpho used to make that call came from what the industry calls an oracle, a feed that tells a lending platform what collateral is worth.

This one took whichever of two numbers was lower, which was PT-reUSD’s average trading price over the previous 15 minutes, or a fixed schedule climbing gradually toward $1 at maturity.