ezETH Depegs, Triggers $60 Million Liquidation Bloodbath

Renzo Protocol’s liquid restaking token, ezETH, experienced a significant depeg on April 24th. This incident resulted in a wave of liquidations across various DeFi platforms, leading to over $65 million in losses. The trigger for this appears to be a change in Renzo Protocol’s tokenomics, which sparked considerable community backlash.

The ezETH depeg highlights the risks inherent in liquid restaking tokens (LRTs). Even when withdrawals are enabled, a substantial sell-off could lead to depegging due to imbalances in decentralized exchange (DEX) liquidity pools.

ezETH Airdrop Disappointment Fuels Depeg

Renzo Protocol’s liquid restaking token (LRT), ezETH, appealed to DeFi “airdrop hunters” seeking early access to the project’s native token, REZ. However, Renzo’s tokenomics announcement caused widespread dismay. Users criticized the small airdrop allocation (5% of REZ supply) and a distribution structure that favored Binance launchpool farmers.

Furthermore, farmers in the REZ Binance Launchpool will receive 2.5% of the token supply two days before ezETH airdrop recipients. This has created concerns that these farmers could sell their tokens ahead of the airdrop, potentially exacerbating price pressures.

The backlash was swift. Disappointed ezETH holders rushed to exit their positions. The only way to redeem ezETH currently is through a $200 million liquidity pool on Blast, an Ethereum layer-two network. This triggered a sell-off and subsequent depeg of ezETH.

DeFi Markets Feel the Impact

The cascading effect caused a chain reaction in DeFi lending protocols. Leveraged positions using ezETH as collateral were automatically liquidated. This further exacerbated selling pressure, causing more liquidations.

While Uniswap briefly showed ezETH trading as low as $700, price oracles used by lenders reported a less severe depeg. Still, liquidations on platforms like Morpho and Gearbox exceeded $65 million, with some individuals facing substantial losses. DeFi security firm Peckshield highlighted one case of a $900,000 position liquidated with roughly $90,000 lost.

The depeg highlights the risks associated with LRTs, even those with withdrawal mechanisms. Despite the turmoil, opportunistic traders still managed to profit. On-chain intelligence firm Lookonchain reports that trader czsamsunsb.eth gained over $396,000 in a mere two hours, capitalizing on the temporary price discrepancy.