Renzo Protocol’s liquid staking token, ezETH, experienced a major decoupling on April 24. This event led to large-scale liquidations on various DeFi platforms, resulting in losses of over $65 million. The event appeared to be triggered by a change in Renzo Protocol’s token economics model, which sparked a strong backlash from the community.
The decoupling of ezETH highlights the risks inherent in Liquid Retention Tokens (LRTs). Even with withdrawals enabled, a large sell-off could cause an imbalance in the liquidity pool of a decentralized exchange (DEX), leading to a decoupling.
Renzo Protocol’s Liquid Staking Token (LRT) ezETH has attracted DeFi “airdrop hunters” seeking to get early access to the project’s native token REZ. However, Renzo’s token economic model announcement has sparked widespread dissatisfaction. Users criticized the small airdrop allocation (5% of REZ supply) and the distribution structure that favors Binance’s issuance pool farmers.
Additionally, REZ’s Binance distribution pool farmers will receive 2.5% of the token supply two days before the ezETH airdrop recipients. This has raised concerns that these farmers may sell tokens before the airdrop, potentially exacerbating price pressure.
The rebound came swiftly. Disappointed ezETH holders rushed to get out. The only way to redeem ezETH at the moment is through a $200 million liquidity pool on Blast, Ethereum’s second layer network. This triggered the sell-off and subsequent decoupling of ezETH.
The DeFi market felt the impact. Leveraged positions using ezETH as collateral were automatically liquidated. This further increased selling pressure, leading to more liquidations.
Although Uniswap briefly showed ezETH trading as low as $700, price oracles used by lenders reported less severe decoupling. However, with over $65 million in liquidations on platforms such as Morpho and Gearbox, some are facing huge losses. DeFi security firm Peckshield highlighted a case where a position worth $900,000 was liquidated, with losses of around $90,000.
The decoupling highlights the risks associated with LRTs, even though these tokens have a withdrawal mechanism. Despite the volatile situation, opportunistic traders still managed to profit. On-chain intelligence firm Lookonchain reported that trader czsamsunsb.eth made more than $396,000 in profits in just two hours, taking advantage of a temporary price discrepancy.