Farmers are trembling over Renzo and the Ethereum community: the ezETH token depeg to $700 leads to the liquidation of many airdrop hunters

During the night we had only a small taste of the impact of a potential collapse of Ethereum’s liquid restaking tokens: Renzo protocol’s ezETH experienced a strong dump, due to the lack of liquidity on DEX, dropping to 700 dollars.

The ezETH-ETH ratio has dropped to the threshold of 0.2, causing several positions in the leverage of airdrop farmers who had used the coin as collateral in money markets such as ZeroLend and Gearbox to be liquidated: in total, liquidations amount to 340 million dollars.

The reaction of Renzo’s competitors was not long in coming, such as Etherfi, which reiterated its superiority as a restaking protocol, as well as the disapproval comments from the Ethereum community criticizing the risks of this system.

All the details below.

Renzo’s LRT Depeg on Ethereum: ezETH at $700 overnight

During the night Renzo, a famous Ethereum restaking protocol, risked collapsing after its token ezETH lost its peg with ETH reaching a price of about 700 dollars.

It all started when, immediately yesterday’s announcement by Renzo regarding the launch of their governance token REZ on April 30th (with an attached Binance launchpool), many users started selling ezETH on decentralized markets.

We remind you that this liquid restaking token allows you to accumulate Renzo Points, which will soon be converted into REZ. The announcement by the Renzo team has therefore marked the end of the farming period and several airdrop hunters have preferred to sell ezETH to move to other projects.

Massive sales have targeted the main DEXs where the currency is traded, leading to its devaluation due to reduced liquidity.

Think that the ezETH ratio to native ETH has reached 0.2, when technically it should be fixed at 1.

Now Renzo’s token has fully recovered the peg, still being traded at a discount of about 1%.

The consequences of the takeoff immediately made themselves felt: many “leverage farmers” who have exploited money markets like ZeroLend and Gearbox woke up scorched this morning with over 340 million dollars of liquidations.

On this kind of platforms it is indeed possible to put ezETH as collateral, borrow stablecoins like USDC, buy other ezETH with the stablecoins, and potentially repeat the cycle indefinitely.

This practice allows you to accumulate many more Renzo Points, as well as other points that make you eligible for further airdrops such as those of EigenLayer, Linea, Blast, ZeroLend etc.

The problem is that if the value of the collateral (ezETH) were to fall for any reason below the borrowed value, there is a risk of liquidating the entire staked portfolio.

Fortunately, this time the settlements were overall contained, and part of them were covered by Gearbox’s emergency fund.

Anyway, the entire Ethereum community got quite a scare, as Renzo is one of the largest protocols for restaking, with a TVL of 3.4 billion dollars.

I just analyzed ezETH depeg consequences for Gearbox. All passive lenders funds are safe, no bad debt was incurred

115 Credit Accounts were liquidated, 10650 ezETH were sold on Balancer pool. Liquidation losses of 25.77 ETH were automatically covered by internal Gearbox… pic.twitter.com/RxxQlAtgBk

— 0xmikko.eth | Token 2049 (@0xmikko_eth) April 24, 2024

Meanwhile, according to what was reported by “Spotonchain“, there are those who took advantage of the discounted price of Renzo’s liquid restaking token to speculate on the markets, managing to earn over 193 ETH in just 2 hours of trading.

The risk of “leverage farming” in Ethereum restaking: Etherfi’s immediate reaction

The practice of “leverage farming” in the context of airdrop hunters has been widely criticized by several users of the Ethereum community immediately after the incident with the token depeg of Renzo ezETH.

Going all in to generate as many restaking points as possible can indeed lead to significant financial losses as soon as the market goes into a downtrend or in case of flash crashes.

Liquidation of ezETH positions on the money market. Source: https://twitter.com/DU09BTC/status/1783054456071868905

In addition to the personal risk (sometimes disproportionate to the potential return) that users take on by engaging in leverage farming, it is worth noting how all of this creates an unhealthy environment for Ethereum and its ecosystem 

Many Ethereum stakers who did not go on leverage, but simply locked their stake on Renzo in order to reuse the consensus stakes found themselves in the middle of an unpleasant situation.

Furthermore, the impact of the liquidation, if it had been of larger amounts, could have affected the price of ETH itself

For the moment, the worst seems to be over and fortunately no major damages have been reported.

In the midst of the storm, Renzo’s main competitor, the Etherfi protocol, took the opportunity to celebrate the superiority of its liquid restaking token eETH as much more liquid than ezETH.

Actually, it was the lack of liquidity in the markets that influenced the drop in the token’s price, resulting in too high of a price impact for sellers.

The representatives of Etherfi have pointed out through a comment on a post criticizing the entire house of cards of Ethereum restaking, that not all LSRT protocols are the same and that there are safer alternatives.