A roughly 3% decline in PT-reUSD triggered about $36.4 million in liquidations on Morpho Tuesday, showing how quickly leveraged DeFi positions can collapse when collateral prices move against them.

The liquidation event was sparked by activity in the related YT-reUSD market, where a large purchase pushed the value of PT-reUSD lower. Borrowers had been using the principal token as collateral for loans on Morpho.

A 3% move is relatively normal in crypto, but the affected positions had very little protection against a decline. Traders had built leveraged strategies that left them with less than a few percentage points of room before their collateral became subject to liquidation.

PT-reUSD is a principal token issued through Pendle and linked to reUSD, a dollar-based asset that generates yield. Pendle separates yield-bearing assets into two tokens: one representing the principal and another representing the yield.

The two tokens have an inverse relationship because both are derived from the same underlying asset. When demand for the yield component rises, its implied value increases, while the principal token becomes less expensive to keep their combined value aligned with the underlying asset.

That dynamic drove Tuesday’s price movement. Blockchain security firm PeckShield reported that a wallet accumulated a significant amount of YT-reUSD, pushing the implied annual yield to about 20%, and then exited the position shortly afterward. The buying activity contributed to a roughly 3% decline in PT-reUSD.

Leverage Amplified the Market Move

The damage spread because traders had built recursive borrowing strategies around PT-reUSD.

Some borrowers deposited PT-reUSD on Morpho, borrowed USDC against the collateral, used the borrowed funds to purchase more PT-reUSD and repeated the process. While the strategy increased potential returns, it also reduced the safety buffer protecting each position.

Some borrowers had less than 3% of available collateral headroom before reaching Morpho’s liquidation threshold.

When collateral falls below the required level, the protocol can automatically sell the assets backing the loan to recover the debt. For traders using high leverage, that means even a small decline can force the entire position to unwind.

Pendle had not responded to a CoinDesk request for comment sent through Telegram at the time of reporting.

Oracle Rules Helped Determine the Liquidations

Morpho relied on an oracle to determine the value of PT-reUSD and assess whether borrowers still had enough collateral.

The oracle compared two values and used whichever was lower: PT-reUSD’s 15-minute average market price or a predetermined price curve that gradually moved toward $1 as the token approached maturity.

The maturity-based curve effectively capped the token’s valuation based on its expected path toward $1. Once PT-reUSD traded below that curve, the 15-minute average became the lower value and was used by the lending system.

Pendle said the oracle had been configured correctly and functioned according to its intended design.

Steakhouse Financial, which curates lending markets where PT-reUSD can be used as collateral, said its vault lenders did not suffer losses and no bad debt was generated. The liquidated collateral was sufficient to cover the associated loans.

Steakhouse temporarily removed capital from the affected markets while reviewing the incident and later started redeploying funds.

The underlying reUSD asset was not affected by the event, according to Steakhouse.