Spark Strategy Lead: rsETH Loan Pullbacks Could Trigger Liquidity Stress Across the ETH Market

Odaily Planet Daily reports that monetsupply.eth, Strategic Lead at Spark, warned on X that tightening liquidity in the stablecoin market is pushing conditions into a more hazardous phase. He said roughly 16.5% of the ETH market is backed by rsETH. If losses from rsETH-backed loans are spread across mainnet and external chains, eMode could take a 10% to 15% haircut, with a further 2% to 3% haircut potentially falling on ETH suppliers to reconcile the broader umbrella structure. That risk encourages ETH suppliers to withdraw quickly, pinning utilization at 100%. At current levels, borrowing rates are not high enough to drive repayment from unrelated LST loops (wstETH, weETH) that could free up liquidity. With ETH withdrawals effectively blocked, borrowers who used ETH as collateral to take stablecoins such as USDT cannot unwind positions even as stablecoin borrow costs climb, removing a key mechanism that typically helps keep lending markets stable. He highlighted two distorted incentives that are keeping utilization stuck at 100%: 1) ETH holders cannot reduce exposure to restore healthier LTVs, and liquidators cannot atomically withdraw or sell collateral, raising the odds of bad debt if ETHUSD declines. 2) Users supplying USDT to exit positions are incentivized to maximize borrowing of other stablecoins. The structure is currently yielding positive returns on a temporary basis, lowering exit costs; even if conditions worsen, he estimates at least 75% of the position's value could still be recovered. His conclusion: pooled and restaked lending markets must preserve liquidity at all costs to function. He added that the recent weakening of Slope2's maximum borrowing rate on Aave is weighing on market resilience and materially increasing the risk of a cascading failure.