ezETH Depegs, Resulting in Massive Liquidation
The liquid restaking token of Renzo Protocol, ezETH, encountered a significant depeg on April 24th, leading to a wave of liquidations across various DeFi platforms and causing losses amounting to over $65 million. The trigger for this event seems to be a change in Renzo Protocol’s tokenomics, which sparked considerable backlash from the community.
The depeg of ezETH emphasizes the risks involved in liquid restaking tokens (LRTs). Even when withdrawals are enabled, a substantial sell-off can cause depegging due to imbalances in decentralized exchange (DEX) liquidity pools.
ezETH
Disappointment from Airdrop Fuels Depeg
The liquid restaking token (LRT) of Renzo Protocol, ezETH, attracted DeFi “airdrop hunters” who were seeking early access to the project’s native token, REZ. However, Renzo’s tokenomics announcement resulted in widespread disappointment. Users criticized the small allocation of the airdrop (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 raised concerns that these farmers might sell their tokens before the airdrop, potentially exacerbating price pressures.
The backlash was immediate. Disappointed holders of ezETH hurried to exit their positions. Currently, the only way to redeem ezETH 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 Experience the Impact
The cascading effect caused a chain reaction in DeFi lending protocols. Leveraged positions that used ezETH as collateral were automatically liquidated, further intensifying selling pressure and leading to more liquidations.
Although Uniswap briefly showed ezETH trading as low as $700, price oracles used by lenders reported a less severe depeg. However, liquidations on platforms like Morpho and Gearbox surpassed $65 million, with some individuals facing significant losses. DeFi security firm Peckshield highlighted one case where a $900,000 position was liquidated, resulting in approximately $90,000 lost.
The depeg emphasizes 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 earned over $396,000 in just two hours by taking advantage of the temporary price discrepancy.
