Renzo Protocol rethinks strategy after $60M in liquidations

    Renzo’s ezETH depeg led to massive liquidations following backlash on its tokenomics. 
    The protocol has amended the tokenomics following massive backlash. 

I have closely followed the recent events surrounding Renzo protocol and their ezETH token depeg. The incident resulted in massive liquidations worth over $60 million, with Renzo’s LRT trading at a significant discount against wrapped ETH on Uniswap.

On Tuesday, the 24th of April, the decoupling of Renzo protocol’s liquid restaking token (LRT), named ezETH, occurred, causing its price to plummet to $688 on Uniswap. This event triggered a wave of liquidations in the Decentralized Finance (DeFi) sector, resulting in over $60 million in losses.

Renzo’s ezETH is designed to track and maintain a peg to Ethereum [ETH] price.

Instead of the protocol’s unpopular airdrop and tokenomics announcement causing a strong backlash from the community, leading to a rapid loss of peg.

On Tuesday, the difference between the price of LRT on Dexscreener and wrapped Ethereum on Uniswap was more than 75% larger.

Renzo Protocol rethinks strategy after $60M in liquidations

Backlash on Renzo crypto tokenomics

I observe that Renzo ranks as the second-largest liquid restaking protocol in the market. This significant stature brings importance to its LRT-ezETH offering, particularly for farmers who are focused on acquiring the protocol’s native token.

In Season 1, Renzo effectively joined the ranks of the second largest decentralized finance protocols by earning substantial rewards through Renzo’s ezPoints program, which oversaw assets worth over $2.3 billion in Total Value Locked.

Users boosted their stakes in ezETH in anticipation of accruing additional points and a larger share of the forthcoming native token “$REZ.”

Instead of Renzo’s declaration that just 5% of REZ tokens would be allocated to users, sparked criticism. Furthermore, concerns arose over the perceived advantage Binance gained in this arrangement.

One of the disgruntled users noted, 

I’ve noticed an intriguing arrangement at Binance: by securing BNB or stables for a mere six days, whales are rewarded with a 2.5% share, free from any risks. Simultaneously, Binance itself has invested with a $25M valuation. In contrast, my group and I have been holding onto $3B worth of ETH for extended periods, all in pursuit of a mere 5% allocation.

I’ve observed some dissatisfied users who had no choice but to offload their ezETH through secondary markets due to Renzo’s restriction on withdrawals, resulting in limited market liquidity.

The ensuing liquidations mostly affected Renzo’s DeFi integrators, such as Gearbox and Morpho Blue.

During the depeg event, approximately half of Gearbox’s total value locked in ezETH was withdrawn, while Morpho experienced significant liquidations.

Renzo crypto critics or opportunists?

In response to the substantial setback, Aave’s founder, Marc Zeller, voiced his disapproval towards Morpho’s approach, labeling it as “taking liberties with risk-taking.”

I’ve observed protocols that deliberately bypass risks in their design, relying heavily on oracles for positive outcomes. However, at times, these seemingly foolproof systems can unexpectedly encounter issues when the oracles fail to deliver accurate information.

I noticed Morpho Labs founder Paul Frambot not taking Zeller’s comment lightly. He pointed out the distinct differences between Morpho and Aave instead.

“On Morpho, unlike Aave, Marc, you have the flexibility to select your preferred assets for collateral, as well as the oracle and Liquidation LTV. However, this does not imply that all strategies are risk-free. Users can still assume the level of risk they desire.”

On his part, Gearbox’s founder reassured that passive lenders were safe. 

Since the incident, Renzo’s ezETH has maintained its connection to Ethereum’s value, and the ezETH protocol has addressed its past problematic token economics.

Despite this, some people consider the potential for a depeg as an inherent risk present in the Liquidity Regulation Token (LRT) system. An anonymous DeFi expert named Ignas pointed out.

If you believe that the decoupling of ezETH is problematic, be prepared as holding LRTs may have seemed safe up until now, but the situation could potentially worsen for them.

When engaging in LRT farming through opaque points programs, beware: The lack of transparency regarding token distribution prior to joining can lead to potential risks.

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2024-04-25 16:56