Renzo's ezETH token depeg triggers liquidations across DeFi platforms

Renzo’s liquid restaking token (LRT), ezETH, experienced a significant depegging event that liquidated millions from “loopers” using the token as collateral on leverage protocols like Gearbox.

According to data from CoinMarketCap, the digital asset’s value plunged to a low of $2,755 before recovering to its current level of $3,178 as of press time.

Notably, decentralized exchange Uniswap witnessed a more severe depegging of ezETH, with its value dropping to as low as $700, attributed to liquidity challenges.

Renzo is a prominent liquid restaking protocol, with over $3 billion worth of assets locked on its platform, according to DeFillama data.

Liquidation galore

The DeFi protocol Gearbox confirmed that the depeg led to the liquidation of several Credit Accounts.

The protocol’s founder, 0xmikko, provided more insights into the situation, saying:

“115 Credit Accounts were liquidated, 10,650 ezETH were sold on Balancer pool. Liquidation losses of 25.77 ETH were automatically covered by internal Gearbox reserve fund, no action needed.”

Simultaneously, Cork Protocol, another DeFi platform, explained that the liquidations caused a substantial sell-off of ezETH previously held as collateral. This flood of supply overwhelmed the market, driving the price of ezETH down to 0.2.

Interestingly, these liquidations occurred alongside the release of Renzo’s native REZ token, sparking the emergence of Renzo-related phishing scams on social platform X (formerly Twitter).

Web3 security firm Scam Sniffer identified two instances where Renzo users cumulatively lost more than $500,000 to a malicious permit signature scam.

Amidst this market turmoil, trader czsamsunsb.eth capitalized on the situation, investing 4,099 ETH to acquire 4,221 ezETH. This move proved lucrative, as the trader earned a remarkable profit of 121.65 ETH, per Lookonchain’s findings.

What does this mean for LRTs?

Crypto analyst Tommy explained that the depegging represents a significant risk across all LRTs, even with withdrawal options enabled. He noted that a depegging event in a decentralized exchange (DEX) pool could occur due to temporary imbalances.

Similarly, DeFi researcher Ignas warned of potential exacerbation in LRT depegging, mainly if Eigenlayer, the platform where these tokens operate, introduces two key upgrades of slashing and permissionless AVS.

Ignas explained that an AVS malfunction leading to slashing could reduce restaked ETH balances by a hypothetical 5%. While this might seem manageable for direct Eigenlayer stakers, it could trigger substantial disruption to LRT pegs due to liquidity concerns and subsequent panic-driven mass withdrawals.

He noted that while prices may stabilize post-slash, the interim period could witness harsh liquidations, and the risk of slashing grows as more AVSes come online.

Consequently, he added:

“It’s all FUD right now as slashing won’t derail Eigenlayer but LRTs 1) with low liquidity 2) and are widely accepted as collateral can cause disproportional damage.”