Spark Protocol Flags rsETH Spillover Risk as Tighter Stablecoin Liquidity Raises DeFi Liquidation Threat

ME News reported that on April 19 (UTC+8), monetsupply.eth, Strategic Lead at Spark Protocol, wrote on X that tightening liquidity in stablecoin markets could be pushing the ongoing rsETH situation into a more dangerous stage. He said roughly 16.5% of the ETH market is backed by rsETH. If losses tied to rsETH are spread evenly across mainnet and cross-chain venues, rsETH-backed loans under eMode could see collateral values marked down by about 10%–15%. After risk buffers are depleted, ETH depositors could still face residual losses of 2%–3%. Under these assumptions, ETH suppliers may rush to withdraw, driving utilization to 100% and effectively "locking" the market. Borrow rates, he argued, are still too low to force leveraged positions such as wstETH and weETH to deleverage and return liquidity. Because ETH cannot be withdrawn in this state, users who borrowed stablecoins like USDT against ETH collateral may be unable to close positions in time, even as stablecoin lending rates climb and the prior incentive structure breaks down. monetsupply.eth warned that with utilization stuck at 100%, DeFi could face a cascading liquidation scenario alongside two warped incentives. First, ETH holders cannot improve their health factors, and liquidators cannot withdraw or sell collateral; a drop in ETH prices could quickly translate into growing bad debt. Second, stablecoin depositors may be pushed to "exit indirectly" by lending other stablecoins, potentially recovering around 75% of capital at low cost while positive yields remain. He added that lending markets dependent on liquidity pools and recollateralization should prioritize liquidity. He pointed to Aave's recent reduction of the maximum borrowing-rate cap (slope2), saying it weakens deleveraging incentives and materially increases systemic failure risk. (Source: ODAILY)