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Spark Strategy Director: rsETH Security Incident Risk Spillover Intensifies, DeFi Market May Face Cascading Liquidation Crisis

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ME News Report, April 19 (UTC+8), Spark Protocol's strategic head of protocol, monetsupply.eth, posted on X platform stating that as liquidity in the stablecoin market begins to tighten, the current rsETH security incident may be entering a more dangerous phase. Approximately 16.5% of the ETH market is backed by rsETH. If related losses are evenly distributed across the mainnet and cross-chain environments, rsETH collateralized loans under eMode could face a 10%-15% discount. After risk buffers are exhausted, ETH depositors may still incur an additional 2%-3% loss. Under this expectation, ETH providers tend to exit as soon as possible, causing market utilization to be locked at 100%, while borrowing rates are insufficient to incentivize looping leverage positions like wstETH and weETH to actively deleverage and release liquidity. Meanwhile, because ETH cannot be withdrawn, users who borrow stablecoins like USDT using ETH as collateral also find it difficult to close positions promptly. Even if stablecoin lending rates rise, the existing market incentives have been broken. monetsupply.eth further pointed out that in a 100% utilization "locked" state, the DeFi market may face a cascade liquidation crisis and two major distorted incentives: first, ETH holders cannot adjust healthy collateral ratios, and liquidators cannot withdraw and sell collateral assets. If ETH prices fall, bad debt could accumulate rapidly; second, stablecoin depositors are actually motivated to achieve a "de facto exit" by lending out other stablecoins. Under the current positive yield environment, they can lock in about 75% of the funds at a lower cost to recover their space. For lending markets that rely on liquidity pools and re-collateralization, liquidity must be prioritized. Recently, Aave lowered the maximum borrowing interest rate (slope2) cap, which is weakening the incentive to deleverage and significantly increasing the risk of chain failures in the market. (Source: ODAILY)
SPK-1.24%
ETH-0.31%
AAVE-3.68%
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ReefUnderTheAurora
· 2h ago
When the market approaches full utilization, any small fluctuation will be amplified by leverage, and I have seen this happen.
View OriginalReply0
AirdropSideQuest
· 3h ago
Stablecoin depositors lend out other stablecoins to indirectly exit; this operation, upon closer inspection, is quite dark humor.
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GateUser-deff9ed8
· 3h ago
Aave lowering slope2 is a bit confusing—since the deleveraging incentive is gone, who’s going to take the hit for the chain reaction?
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GateUser-f4b3df7a
· 3h ago
75% of the funds are locked—this liquidity trap is so ruthless it’s impossible to escape.
View OriginalReply0
CraterLiquidity
· 3h ago
ETH can't be withdrawn, and even closing the position can't be executed. Isn't this clearly telling you to wait for liquidation?
View OriginalReply0
CheckTheBlockchainBefore
· 3h ago
eMode discounts of 10-15% sound okay, but after depletion, there's still a 2-3% hard loss, depositors are really caught between a rock and a hard place.
View OriginalReply0
DAOBackbencher
· 3h ago
This warning from Spark is timely, but the market utilization is almost 100%, and liquidity release can't keep up with the liquidation speed.
View OriginalReply0
There'sABullMarketInTheGlass.
· 3h ago
rsETH this leverage stacking is a bit frightening; a 16.5% ETH collateral ratio, once something goes wrong, it’s a systemic risk.
View OriginalReply0

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