Passive Income from LSDs is a Misnomer

Staking is not a set-and-forget yield source. It's an active exposure to slashing risk, validator performance, and governance decay. The ~3-5% APR is compensation for bearing these non-zero risks, not a coupon payment.

• Slashing Risk: Validator misbehavior can lead to principal loss.
• Performance Drag: Poor uptime or latency reduces your effective yield.
• Governance Inertia: You are betting on the long-term health of the underlying chain.

Protocols like EigenLayer and Karak reframe the LSD not as passive income, but as productive capital for securing new networks. This transforms a static asset into a lever for earning additional yield from AVS (Actively Validated Services) rewards.

• Capital Efficiency: Your staked ETH secures multiple protocols simultaneously.
• Yield Stacking: Potential for double-digit APYs from combined staking + re-staking rewards.
• New Risk Vector: You are now exposed to the slashing conditions of every AVS you opt into.

The 'liquid' in LSD creates a false sense of security. Secondary market liquidity for tokens like stETH or rETH can evaporate during market stress, decoupling from NAV. The $10B+ LSDfi ecosystem built on these derivatives adds compounding systemic risk.

• Depeg Events: stETH traded at a ~7% discount during the Terra/Luna collapse.
• Contagion Risk: LSDs are the collateral backbone for major DeFi protocols like Aave and Maker.
• Oracle Reliance: The entire stack depends on accurate price feeds for a synthetic asset.

Most LSD providers offer slashing insurance, but coverage is often capped and doesn't account for correlated failures. You're not earning yield; you're selling tail-risk insurance for ~3-5% APR.

• Coverage Caps: Pools often cover only ~1-2 ETH per validator, a fraction of the 32 ETH at risk.
• Correlation Risk: A network-wide client bug could slash thousands of validators simultaneously, bankrupting the insurance pool.

Lido's ~30%+ market share creates systemic risk. Your "passive" stETH yield includes a premium for underwriting the governance and operator centralization of the largest staking pool.

• Governance Attack Surface: A compromise of Lido DAO could impact $30B+ TVL.
• Operator Concentration: Top 5 node operators control a majority of stakes, creating a honeypot for regulators and hackers.

LSDs like stETH are used as collateral across DeFi (e.g., Aave, Maker). A depeg or liquidity crisis in the underlying LSD triggers a system-wide deleveraging event. Your yield is compensation for this latent contagion risk.

• Collateral Multiplier: stETH is used as collateral at ~70-80% LTV on major money markets.
• Liquidity Fragility: Secondary market liquidity can evaporate during stress, as seen in the UST/Luna collapse.

Rocket Pool's 8 ETH minipool model distributes node operation but transfers execution and slashing risk directly to rETH holders. The higher yield (~1-2% over Lido) is a direct risk premium.

• Operator Skin-in-the-Game: Node operators only post 8 ETH, while the pool stakes 24 ETH of user funds per validator.
• Protocol-Enforced Slashing: rETH value is diluted to cover slashing events, a direct hit to principal.

The SEC's stance on staking-as-a-service means major LSD providers are perpetual targets. Your "passive" income is a bet against regulatory action that could freeze redemptions or classify the token as a security.

• Enforcement Precedent: Kraken's staking service was shut down by the SEC, setting a clear precedent.
• Redemption Risk: A regulatory seizure could halt unstaking queues, trapping liquidity for months.

Restaking via EigenLayer doesn't create yield; it layers additional smart contract and consensus risks atop your existing LSD position. The extra APR is payment for underwriting experimental Actively Validated Services (AVS).

• Cascading Slashing: An AVS failure can trigger slashing on the underlying Ethereum validator.
• Smart Contract Risk: Adds new attack vectors beyond core Ethereum consensus.

Yield from LSDs isn't passive; it's a claim on a validator's performance and the protocol's solvency. The $30B+ LSD market is built on a chain of liabilities.

• Lido's stETH is a claim on the performance of ~200 node operators.
• Frax's frxETH uses a multi-layered system with its own validator set and liquidity pools.
• Risk compounds when LSDs are used as collateral in DeFi (e.g., Aave, MakerDAO).

EigenLayer makes the active management explicit by allowing staked ETH to be restaked to secure other protocols (AVSs). This turns "passive" assets into active security capital.

• Validators opt-in to additional slashing conditions for extra yield.
• Creates a marketplace for cryptoeconomic security, moving beyond simple delegation.
• Introduces new systemic risks (correlated slashing) that require active monitoring.

The extra yield from LSTs and restaking isn't free. It's compensation for taking on smart contract risk, validator failure risk, and liquidity risk.

• Rocket Pool's rETH yield includes a premium for node operator bond (RPL) and protocol insurance.
• Lido's stETH yield is net of a 10% fee to the DAO and node operators.
• True "passive" yield is just the base Ethereum protocol issuance, ~3-4%. Everything else is active risk.

The stack is unbundling into specialized layers: delegation (Lido), restaking (EigenLayer), and liquidity (Pendle, Kelp DAO). This creates composability but also fragmentation.

• Users must now manage exposure across multiple risk layers and smart contracts.
• Protocols like Symbiotic and Babylon are bringing similar models to Bitcoin and Cosmos.
• The endgame is a portfolio of slashing conditions, not a single asset.