Morpho Sees $36M Liquidations After PT-reUSD Drops 3%

A roughly 3% decline in PT-reUSD triggered about $36.4 million in liquidations on decentralized lending platform Morpho on Tuesday, highlighting the risks of highly leveraged crypto lending strategies.

PT-reUSD is a principal token created through Pendle and linked to reUSD, a dollar-denominated yield-bearing asset. Pendle allows users to split yield-generating assets into principal tokens (PT) and yield tokens (YT), whose combined value reflects the underlying asset.

The market disruption began when a wallet purchased a large amount of YT-reUSD, according to blockchain security firm PeckShield. The trade pushed the token's implied annual yield to around 20% before the wallet exited the position shortly afterward. As demand for the yield component increased, PT-reUSD fell approximately 3%.

While such a price swing is relatively common in cryptocurrency markets, several Morpho borrowers were running leveraged strategies with little room for losses. Traders had deposited PT-reUSD as collateral, borrowed USDC, used those funds to purchase additional PT-reUSD and repeated the process.

This looping strategy amplified potential returns but left some positions with less than 3% of collateral headroom. Once PT-reUSD declined, Morpho automatically liquidated positions that fell below required collateral levels.

The platform relied on an oracle to determine PT-reUSD's collateral value. The feed selected the lower of the token's 15-minute average market price or a predetermined pricing curve that gradually approaches $1 as the token reaches maturity. When the market price dropped below that curve, the 15-minute average became the valuation used for liquidations.

Pendle said the oracle operated as configured and performed according to its design.

Steakhouse Financial, which curates Morpho lending markets accepting PT-reUSD collateral, said its vault lenders were unaffected and that the event created no bad debt. It temporarily withdrew funds from affected markets while reviewing the incident before beginning to redeploy capital.

Steakhouse also said the underlying reUSD asset remained unaffected by the PT-reUSD price movement.