Woofun AI reports that a mere 3% price correction in PT-reUSD initiated a cascade of $36.4 million in liquidations on the Morpho lending platform early Tuesday, exposing the fragility of highly leveraged DeFi strategies built on Pendle's yield-splitting architecture.

The immediate catalyst was identified by blockchain security firm PeckShield, which traced the volatility to a single wallet's aggressive maneuver in the YT-reUSD market. This entity purchased a substantial volume of yield tokens, driving the implied annual yield to an extreme 20%, before rapidly exiting the position. The resulting arbitrage pressure forced PT-reUSD prices downward by approximately 3%. While such percentage movements are routine in crypto markets, the structural vulnerability of the borrowers involved meant that even this modest shift proved catastrophic for their positions.

The underlying risk stemmed from recursive leverage strategies employed by traders on Morpho. Participants deposited PT-reUSD as collateral, borrowed stablecoins such as USDC, and used the borrowed capital to purchase additional PT-reUSD, repeating the cycle to amplify returns. This loop systematically eroded the margin of safety, leaving borrowers with less than 3% headroom before their loans would be automatically closed out. The strategy relied on price stability, yet the inherent mechanics of Pendle's tokenization made it susceptible to sudden yield shocks.

Woofun AI data shows that the execution of these liquidations was governed by strict oracle logic. Morpho utilized a feed that selected the lower of two valuation metrics: the 15-minute average trading price of PT-reUSD or a fixed schedule gradually climbing toward $1 by its maturity date of Dec. 10. The fixed schedule acted as a cap, ensuring PT-reUSD was never valued above its path to redemption. When the market price dipped below this curve, the 15-minute average became the binding variable, triggering immediate collateral sales to repay loans without borrower consent.

Platform responses reflected the contained nature of the event. Pendle did not immediately respond to a request for comment on Telegram, while Steakhouse Financial, which curates lending markets accepting PT-reUSD, confirmed that lenders in its vaults were unaffected and no bad debt was created. The liquidations generated sufficient funds to cover the outstanding loans. Steakhouse temporarily withdrew capital from the affected markets to assess the incident, then began redeploying funds, signaling a quick restoration of confidence in the specific lending pools.

The underlying reUSD asset remained unaffected by the turmoil, highlighting that the instability was confined to the derivative structure rather than the base asset. This incident underscores the persistent risks of high leverage in decentralized finance, where small price dislocations can erase substantial capital. As the market stabilizes, the focus shifts to how platforms might adjust oracle configurations or margin requirements to prevent similar cascades in the future.