Depeg of $3B restaking token ezETH causes over $60M in DeFi liquidations

Renzo Protocol’s liquid restaking token (LRT), ezETH, suffered a sharp depeg overnight, in response to an unpopular and misleading tokenomics announcement.

LRTs are popular with so-called ‘airdrop hunters’ in the decentralized finance (DeFi) sector. Many opt to take on highly leveraged exposure to the ETH-pegged assets to increase their chances of receiving a portion of the project’s own token upon launch.

However, the announcement faced significant backlash as it revealed that just 5% of Renzo’s REZ token supply was set aside for the initial airdrop (despite the disingenuous use of a not-to-scale pie chart). The image has since been adjusted.

Read more: Blast L2-based lending platform makes costly error, liquidating users for $26M

Another point of contention was the fact that ‘farmers’ of REZ’s Binance launchpool would recieve 2.5% of tokens two days earlier than ezETH holders, giving plenty of time for them to dump their share before the airdrop recipients.

The disappointment among ezETH holders led to many moving to unwind their positions.

The depeg was a result of traders looking to exit their holdings of ezETH, which doesn’t currently allow for direct withdrawals into the underlying assets. Instead, their only option was reportedly via a $200 million liquidity pool on Blast, an Ethereum layer-two network.

In what is known as a ‘liquidation cascade,’ the leveraged positions that used ezETH as collateral were automatically unwound on DeFi lending platforms. This sell-off of the collateral further depressed the ezETH price, creating a positive feedback loop and resulting in the liquidation of more positions.

Read more: Seneca Protocol hack highlights dangers of Ethereum’s token approval mechanism

The price of ezETH briefly dropped as low as $700 on Uniswap. However, the price oracle by lenders, which averages prices across various markets, reported a much smaller depeg. This had the effect of only liquidating traders that were 5x leveraged or more.

Liquidations across Morpho and Gearbox (around 10,000 ezETH each) summed over $65 million, reportedly resulting in protocol losses of $34k and $83k, respectively. DeFi security firm Peckshield noted how one unlucky individual lost around $90,000 when their $900,000 position was liquidated.

Another user lost almost $300,000 to a phishing scam impersonating the official Renzo X (formerly Twitter) account.

The incident opened a debate over the purpose of DeFi lending platforms as Aave governance delegate Marc Zeller accused Morpho, and its risk advisors Gauntlet, of not doing enough to protect its users.

Morpho’s Paul Frambot responded that its approach is different to that of Aave, allowing users to set their own risk parameters rather than manage elements such as collateral assets and loan-to-value ratios via DAO governance.

This is not the first time the two have butted heads. Just over two months have passed since the sudden departure of Aave’s long-time risk advisor Gauntlet, which then joined Morpho days later.

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