Liquidity staking protocol Renzo saw explosive growth in 2024, reaching a peak of over 1 million ETH in deposits worth around $3.3 billion.
Like many protocols surrounding EigenLayer, the surge in deposits was driven by points incentives, not only for depositing ETH directly with Renzo but also including more speculative opportunities.
Partnerships with other DeFi protocols have encouraged holders of Renzo's ezETH (LRT) liquidity staking token to gain traction through leveraged vaults, such as with Morpho and Gearbox.
Since ezETH and ETH are often correlated, assets can theoretically be “replicated” by depositing ezETH, borrowing ETH, and restaking that amount to acquire more ezETH. This process is then repeated many times to maximize profits.
But when ezETH was suddenly sold off following a misstep in releasing upcoming airdrop allocations earlier this week, that correlation broke down, causing a liquidation.
Some users lost millions of dollars.
According to user X, Morpho's ezETH total value locked (TVL) at the time was above $700 million.
Gearbox co-founder Ivan GBI noted that anyone with leverage above about 6x was liquidated.
The problem is not insolvency but illiquidity. Each ezETH is backed by 1 ETH staked with a validator and retaken with an EigenLayer, but unstaking those operations takes time, and in Renzo's case it's not even possible yet because the protocol doesn't allow it yet. withdraw money.
The only way to access the underlying ETH quickly is to sell through an on-chain liquidity pool. According to LRT EtherFi protocol co-founder Mike Silagadze, it turns out it didn't take much effort to unbalance those pools to the point of causing a panic.
“Even if one in a thousand users wanted to participate and redeem their tokens, that would be enough to cause the price peg to move a bit. This is not something crazy or unusual but is actually completely predictable in terms of user behavior,” he said, referring to the end of Renzo's original scoring program.
How can it be avoided?
The biggest problem is the lack of withdrawal capabilities, which are expected to launch next month.
As of today, a member of the team in the project's official Discord channel has written that they don't have an “exact date yet but it will be very soon”, maybe “early May”, after completing the audit and review. Other code prices.
That uncertainty makes it difficult for potential arbitrageurs to estimate the opportunity cost of buying discounted staking derivative tokens and restoring balances.
As of now, 1 ezETH trades at about 1.7% less than 1 ETH.
Even in the best of times, EigenLayer would have a week-long unstaking delay, so it's conceivable that illiquidity discounts are the norm, all else being equal.
Of course, constant incentives in the form of points and future tokens will influence the decisions of each trader.
This situation is no different from the deviation from the target price that occurred with Lido's stETH in May 2022, before Ethereum's Shapella upgrade, which made withdrawals of staked ETH possible for the first time.
In contrast, EtherFi always has the ability to exchange eETH for ETH, so just consider potential withdrawal delays.
The protocol maintains “liquidity pool reserves” but EtherFi's withdrawal UI warns users “if there is not enough ETH in the liquidity pool reserves to fulfill your request, the protocol will need to exit from the authenticator to complete this transaction."
EigenLayer itself also has a withdrawal period of about 7 days.
Under normal circumstances, liquidity pool reserves would allow eETH buybacks at a 1:1 ratio in 4-12 hours, Silagadze said.
“After our token generation event in mid-March, EtherFi had quite a large amount of withdrawals,” he recalls, but with withdrawals enabled, “when people were looking to exit the protocol (rather than destroying the protocol), most people can simply go directly to the protocol and request a withdrawal.”
That feature combined with about $30 million in on-chain liquidity prevented any issues with convertibility back to ETH. Today, eETH/ETH liquidity has more than tripled to $100 million.
The LRT Swell protocol enabled the withdrawal of liquid staking swETH tokens in February and allows switching between EigenLayer rswETH and swETH restaking versions through its application.
One difference Silagadze noted is that the percentage of eETH used in leveraged loops is much lower than in other LRTs.
He called the use of leverage “a very problematic practice that we see with LRTs, which are very complex assets.”
Even a small crash of 1-2% could cause liquidations as leveraged protocols are forced to sell LRT, further destabilizing it. And that can happen quickly without much warning. The initial ezETH crash occurred in less than 20 minutes – therefore, without an automated process to detect the crash and repay or add collateral, point farmers could easily easily lose points while they are sleeping soundly on a soft bed.
Team Renzo did not directly address the ezETH deviation through announcements on the Discord or X channels but did modify the airdrop plan following criticism. Distribution of 7% of total token supply is currently set to begin on April 30.
Source: https://tapchibitcoin.io/giai-ma-nguyen-nhan-nguoi-dung-o-at-thanh-ly-token-restaking-thanh-khoan-ezeth-cua-renzo.html
