PT-reUSD, a token on the Ethereum lending platform Morpho, dropped about 3%. That move triggered roughly $36.4 million in liquidations, after one wallet's large trade in a related Pendle market pushed the token's price down just enough to wipe out borrowers who had almost no cushion left.
One wallet's trade in a related market moved the value of what borrowers had put up as security on Tuesday.
Moves of this size are ordinary in crypto. But the borrowers who lost their positions had built strategies that could not survive this one.
A seesaw between two tokens
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.
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 bid up the interest, and the principal side has to get cheaper to compensate.
That is what happened here. 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 afterward. The buying pushed PT-reUSD down by about 3%.
Leveraged loops left almost no room for error
The trouble sat in what other traders had built on top of that token. Some 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 shrank the margin for error, so borrowers running this trade had left themselves less than 3% of headroom before their loans would be closed out automatically.
Pendle did not immediately 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.
How the price feed made the call
The price Morpho used came from an oracle, a feed that tells a lending platform what collateral is worth. This one took whichever of two numbers was lower: PT-reUSD's average trading price over the previous 15 minutes, or a fixed schedule climbing gradually toward $1 at maturity.
The fixed schedule acted as a cap, preventing PT-reUSD from being valued above the price implied by its path toward $1 at maturity. When the market price fell below that curve, the 15-minute average became the lower number and took over.
Pendle states the feed was configured correctly and did what it was designed to do.
No bad debt, Pendle and Steakhouse say
Steakhouse Financial, which curates lending markets that accept PT-reUSD as collateral, said lenders in its vaults were unaffected and no bad debt was created, meaning the liquidations raised enough to repay the loans. Steakhouse pulled its money out of the affected markets while it looked at what happened, then began putting it back.
The underlying reUSD asset remained unaffected, according to Steakhouse.
Source: CoinDesk
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