A 3% PT-reUSD Move Triggered $36 Million in DeFi Liquidations
A relatively small move in a decentralized-finance token triggered approximately $36.4 million in liquidations on Morpho, exposing the risks of highly leveraged DeFi strategies.
The liquidations occurred after PT-reUSD, a principal token issued through Pendle, fell roughly 3% following heavy buying activity in its paired yield token.
While a 3% move is ordinary in cryptocurrency markets, it was enough to push leveraged borrowers below the liquidation threshold because many had built recursive strategies with very little collateral buffer.
The incident highlights how liquidity, leverage, collateral pricing and oracle design can interact inside DeFi lending markets.
A Large YT-reUSD Trade Pushed PT-reUSD Lower
According to blockchain security firm PeckShield, one wallet accumulated a large amount of YT-reUSD, pushing the implied annualized yield to around 20% before the wallet subsequently exited the position.
The buying pressure affected the relationship between YT-reUSD and PT-reUSD, causing the principal token to fall by roughly 3%.
That decline became significant because PT-reUSD was being used as collateral across Morpho lending markets.
The underlying mechanism comes from Pendle's tokenization system, which separates an interest-bearing asset into principal and yield components.
How Pendle's PT and YT Tokens Work
Pendle allows users to divide an interest-generating asset into two separate claims.
The principal token (PT) represents the underlying principal and can be redeemed for the corresponding asset at maturity. In this case, PT-reUSD is scheduled to mature on Dec. 10.
The yield token (YT) represents the future yield generated by the underlying asset until maturity.
Because both tokens originate from the same underlying asset, their values are interconnected.
When traders aggressively buy the yield component, the implied value of future yield can rise while the principal component becomes cheaper.
That relationship is what created the price move that ultimately affected leveraged borrowers.
Why a 3% Move Caused $36 Million in Liquidations
The major problem was not simply the decline in PT-reUSD. It was the amount of leverage borrowers had built around the token.
Some traders deposited PT-reUSD on Morpho, borrowed USDC against it and then used the borrowed funds to purchase additional PT-reUSD.
They could then deposit that additional collateral and borrow more USDC, repeating the process.
This type of recursive strategy can increase potential returns, but it also makes positions extremely sensitive to relatively small changes in collateral value.
In the affected markets, some borrowers reportedly had less than 3% of headroom before reaching their liquidation thresholds.
Once PT-reUSD declined by roughly the same magnitude, those positions became eligible for automatic liquidation.
How DeFi Liquidations Work
In a lending protocol, borrowers must maintain sufficient collateral relative to their outstanding loans.
If the value of that collateral falls below the required threshold, the protocol can automatically sell the collateral to repay the borrowed assets.
Unlike traditional lending, this process does not require a bank or broker to contact the borrower before closing the position.
That means a relatively modest market move can cause a leveraged DeFi position to disappear almost immediately when the borrower has little remaining collateral buffer.
In this case, the combination of recursive leverage and a narrow liquidation margin amplified the impact of the PT-reUSD decline.
The Oracle Was Critical to the Liquidation Event
Another important part of the incident was the oracle, the pricing mechanism used by Morpho to determine the value of PT-reUSD collateral.
The oracle considered two different values and used the lower one.
One was the 15-minute average market price of PT-reUSD. The other was a predetermined price schedule that gradually moved toward $1 as the token approached maturity.
The schedule effectively placed a ceiling on the collateral valuation based on PT-reUSD's path toward its redemption value.
When the market price moved below that schedule, the 15-minute average became the lower value and therefore determined the collateral price used by the lending system.
That pricing mechanism ultimately helped determine when borrowers crossed their liquidation thresholds.
Pendle Says the Price Feed Worked as Designed
Pendle stated that the relevant price feed was configured correctly and operated according to its intended design.
That distinction is important because the liquidation event does not necessarily indicate an oracle malfunction.
Instead, the incident demonstrates how a correctly functioning oracle can still produce significant consequences when a thinly buffered leveraged strategy experiences a sudden price move.
Morpho's use of the lower of the two pricing inputs meant the decline in PT-reUSD was reflected in the collateral valuation used for lending decisions.
Lenders Avoided Bad Debt
Steakhouse Financial, which helps curate lending markets involving PT-reUSD collateral, said its vault lenders were unaffected by the event.
It also reported that the liquidations generated enough proceeds to repay the associated loans, meaning the episode did not create bad debt for the affected markets.
Steakhouse temporarily withdrew funds from the markets while investigating the incident before beginning to redeploy capital.
The distinction between liquidations and bad debt is important. A large liquidation event can be damaging to borrowers without necessarily creating losses for lenders if the collateral sold during liquidation is sufficient to cover outstanding debt.
The Underlying reUSD Asset Was Not Affected
Despite the sharp move in PT-reUSD and the resulting liquidations, Steakhouse said the underlying reUSD asset remained unaffected.
That means the incident was primarily related to the market structure surrounding the tokenized principal and yield positions rather than a direct failure of the underlying dollar-denominated asset.
The episode nevertheless demonstrates how derivatives of yield-bearing assets can develop their own liquidity and pricing dynamics.
What This Means for DeFi Traders
The PT-reUSD liquidations provide another example of how leverage can transform an ordinary market move into a much larger liquidation event.
A 3% decline may appear relatively insignificant in crypto, but traders using recursive borrowing can have liquidation thresholds only slightly below current market prices.
When those thresholds are crossed, automatic selling can rapidly close positions and potentially add further pressure to the affected collateral.
For DeFi users, the incident reinforces the importance of monitoring collateral ratios, liquidation thresholds, oracle mechanisms, liquidity and leverage levels rather than focusing only on the underlying asset's long-term fundamentals.
The Bigger Lesson From the $36 Million Liquidation
The roughly $36.4 million liquidation event shows that DeFi risk does not always require a major market crash.
A relatively small price dislocation can become highly consequential when traders build leveraged loops around assets with specialized pricing mechanisms.
In the PT-reUSD case, aggressive activity in the yield-token market pushed the principal token lower, while leveraged borrowers had positioned themselves with very little room for error.
The liquidations were ultimately completed without reported bad debt, and the underlying reUSD asset remained unaffected.
Still, the event offers a clear warning for DeFi traders: when leverage is high and collateral buffers are thin, a 3% token move can be enough to wipe out tens of millions of dollars in positions.
