A thinly traded Pendle yield market was manipulated early Tuesday to trigger approximately $36.1 million in liquidations on Morpho, wiping out leveraged positions in roughly 14 minutes while leaving lenders unharmed. The incident has renewed debate over oracle design in decentralized finance and the risks of looped yield strategies, especially in markets where collateral values can change quickly relative to available liquidity.

The attack targeted the Pendle reUSD principal token pool maturing December 10, which held under $9 million in liquidity, while the Morpho lending market accepting those tokens as collateral contained $67.5 million in collateral against $52.2 million in borrows.

Borrowers had looped their positions to health factors as low as 1.03, leaving buffers of less than 3% against price movements. Between 04:37 and 04:51 UTC, 33 liquidation events repaid $36.14 million in debt and seized 38.6 million principal tokens, with the USDC market accounting for nearly all losses. The three largest liquidated positions totaled $13.01 million, $11.01 million, and $6.83 million.

Onchain analysts identified a single wallet that purchased reUSD yield tokens to push the implied yield to 20%, flooding the principal token pool and depressing its price. The same entity appears to have executed the liquidations, with one analyst estimating realized gains of at least $360,000.

Pendle and vault curator Steakhouse Financial both said the price feed operated as intended, pointing to the lower of a 15-minute average market price and a fixed maturity curve. When the market price fell, the average became the reference, reducing collateral values and pushing overleveraged borrowers across the 91.5% liquidation threshold.

The protocol recorded zero bad debt. PENDLE declined 4.3% to $1.74 and MORPHO fell 5% to $2.52, although both remained up roughly 29% over the week.

From Warning to Redesign

The vulnerability was publicly flagged eight days earlier, when a user noted on the Morpho governance forum that borrow volume far exceeded available liquidity. That warning now adds context to the liquidation cascade: the market was not only thinly traded, but also already recognized by participants as having limited depth relative to open borrowing. Steakhouse had also acknowledged in a 2025 forum post that market-based oracles, while closer to true prices, are susceptible to manipulation in thinly traded pools.

Re Protocol, which issues reUSD, said it is investigating whether the principal token market price was intentionally manipulated and is working with teams on a safer oracle configuration. No involved protocol has formally accused the trader of manipulation.

In response to the incident, LlamaRisk outlined an alternative architecture it is proposing for Aave under the LlamaGuard PT system. Rather than referencing pool prices directly, the design uses a multi-day smoothed rate that re-prices only when drift exceeds a published 0.30% gate, with each step bounded by contract-enforced limits and subject to minimum delays between updates. LlamaRisk said this would force any attacker to maintain pool displacement for days rather than minutes, making manipulation slow, expensive, and visible.

The system also uses dynamic liquidation thresholds that rise as principal tokens approach maturity, automatically expanding borrowing power as the asset de-risks. The architecture runs on Chainlink’s decentralized runtime environment, with workflow code cryptographically verifiable and parameters owned by Aave Governance rather than a delegated operator.