A 3% token move just triggered $36 million in Ethereum DeFi liquidations
A minor 3% price fluctuation in a Pendle-based token triggered $36 million in liquidations across the DeFi platform Morpho. The liquidations occurred because traders had over-leveraged their positions using a recursive borrowing strategy that left them with very little margin for price volatility.
Why it matters
This event demonstrates the systemic risks inherent in recursive DeFi lending strategies and how small market movements can cause significant financial cascades.
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.
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