A 3% price fluctuation triggered $36.39 million in liquidations; Morpho’s cyclical leverage proved to be a fatal weakness.

A rare “stress test” unfolded in the Morpho lending market: a single wallet’s massive buying and selling of Pendle’s yield certificate YT-reUSD caused a short-term 3% downward adjustment of PT-reUSD, triggering a chain reaction of nearly $36.39 million in loop leverage liquidations. Both Pendle and Steakhouse clarified that it wasn’t an oracle misconfiguration; this event truly exposed the systemic weakness of insufficient buffers in DeFi loop lending.
(Background: Ethereum falls below $1600! Up to 343,000 ETH in DeFi protocols are on the verge of liquidation, $1565 becomes the first line of defense )
(Background supplement: DeFi event summary | MakerDAO’s Black Thursday: $8.32 million in collateral auctioned off at “0 price” )
byMorpho, one of Ethereum’s largest lending protocols, experienced a rare “stress test” early Tuesday morning: a mere 3% fluctuation in token price triggered a chain of liquidations totaling nearly $36.39 million. The incident originated from a large YT (Yield Certificate of Investing) transaction on the Pendle platform.

The collateral that was liquidated was PT-reUSD, an interest-bearing certificate issued on Pendle and accruing interest through the USD-denominated asset reUSD. Simply put, Pendle splits an interest-bearing asset into two: the principal certificate (PT) represents the right to redeem an equivalent amount of USD at maturity, while the yield certificate (YT) covers the interest accrued during the holding period. Like sharing a pie, if a large amount of capital flows into the yield side, the price of the principal side will automatically adjust downwards to balance it out.

On-chain monitoring by blockchain security company PeckShield shows that a wallet first bought a large amount of YT-reUSD, pushing the implied annualized yield up to about 20%, and then sold it all shortly afterward. This operation caused PT-reUSD to fall by about 3% in the short term. The liquidation trend can also be cross-verified on the official Morpho liquidation information page .
What truly escalated the situation was the borrowers’ leverage tactics: some users pledged PT-reUSD on Morpho, borrowed the stablecoin USDC, and then used the borrowed money to buy more PT, repeatedly engaging in a “loop of borrowing and lending.” With each additional cycle, the potential returns increased, but the margin for error shrank, eventually forcing their positions down to less than 3% of the liquidation buffer.

Morpho’s oracle, used to determine collateral prices, takes the lower of two values: the average price of PT over the past 15 minutes, or an interest rate curve that consistently rises to $1 on the expiration date. If the market price falls below that curve, the 15-minute average price becomes the valid quote. Following this incident, Pendle officially clarified on his official X account that the liquidation of the PT-reUSD/USDC market was not due to an oracle misconfiguration, and that the price sourcing mechanism functioned as designed.

Steakhouse Financial, which orchestrated these markets , responded on the X platform that its depositors in its vaults suffered no losses or incurred bad debts because the proceeds from the liquidation and sale were sufficient to repay the loans. The institution temporarily withdrew funds for review and then reinvested them after confirmation. The underlying asset, reUSD, itself was not affected.

Why can a single transaction trigger the entire clearing chain?

This incident illustrates the vulnerability of DeFi’s loop leverage: even if the trigger point is just a normal 3% fluctuation, as long as the participants’ position buffer has been eaten up by “loop lending” to less than 3%, it is enough to instantly concentrate the originally dispersed risks onto the same liquidation engine. High yields are often backed by a price, and this price is precisely the buffer space “available for repayment”.

On the other hand, while the “conservative pricing” design of oracles maintained system stability under the premise of error-free configuration, it was powerless to prevent the liquidation dominoes caused by “the price itself falling.” In other words, oracles were not the culprit of this event, but they also could not provide any additional protection for highly leveraged stakers.

Market Impact and Follow-up Observations

• Regarding Morpho and Pendle: This incident has brought the long-tail risk of yield arbitrage combinations such as “Pendle splitting + Morpho cyclical pledging” to the forefront, and auditors’ views on PT-type collateral may become more conservative.
• For DeFi as a whole: a single wallet triggering tens of millions of dollars in liquidation through a few on-chain transactions is bound to become a new model for risk monitoring and security auditing.
• Follow-up observation 1: Whether it will prompt lending agreements to reduce the loan-to-value (LTV) ratio for PT-type collateral and add a mechanism buffer.
• Follow-up observation 2: Whether Pendle is a price floor or a clearing insurance mechanism for YT/PT splitting has become the next focus of observation.
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