The Future of Collateral: Why Every Stablecoin Will Be Backed by LSTs

Proved the product-market fit for LST-backed stablecoins with eUSD. It turns idle staking yield into a native, yield-bearing stable asset.

• Capital Efficiency: Users earn staking yield and borrowing yield simultaneously.
• Stability Mechanism: Uses a ~170% collateral ratio and arbitrage mechanisms to maintain peg.
• Network Effect: Dominant on Ethereum L2s like Linea and Mode, with $500M+ peak TVL.

Builds a generalized LST vault system supporting mkUSD. Its risk-isolated architecture is the blueprint for the future.

• Risk Segmentation: Isolates different LSTs (e.g., stETH, cbETH) into separate vaults to contain depeg risk.
• Governance Minimization: Liquidations are fully automated via Chainlink oracles and a keeper network.
• Scale: Attracted $1B+ TVL by offering deeper liquidity and broader collateral acceptance than single-asset models.

Extends the LST collateral thesis into derivatives with USDe, creating a crypto-native, yield-bearing 'synthetic dollar'.

• Delta-Neutral Backing: Collateralizes stETH and shorts ETH perpetual futures to create a USD-pegged asset.
• Yield Source: Captures both staking yield and funding rates, often generating >20% APY.
• Systemic Importance: Grew to $2B+ in supply in months, demonstrating massive demand for non-traditional, yield-generating stable assets.

$70B+ in LSTs is largely dormant as collateral. Traditional stablecoins like USDC rely on off-chain trust and offer 0% native yield.

• Capital Inefficiency: Staked assets are locked in a single yield source.
• Trust Dependence: Fiat-backed stables reintroduce centralization and regulatory attack vectors.
• Yield Fragmentation: Users must constantly move between staking, lending, and trading protocols to optimize returns.

LST-backed stables are native to DeFi. They are the logical endpoint for collateral efficiency, merging secure backing with inherent yield.

• Composability: Becomes the default collateral and medium of exchange across Aave, Compound, and Uniswap.
• Automated Stability: Pegs are maintained via on-chain arbitrage and liquidation mechanisms, not banking partners.
• Yield Stacking: The base layer of a new financial stack where money itself appreciates, enabling negative-rate lending and sustainable protocols.

The trajectory is clear: LSTs will become the primary reserve asset for the decentralized financial system, outcompeting traditional bonds and fiat deposits.

• Network Security Flywheel: Demand for stablecoins directly increases demand for staking, securing the underlying L1.
• Monetary Policy via Code: MakerDAO's Endgame Plan explicitly shifts to staked ETH as its core reserve, signaling industry direction.
• Trillion-Dollar Addressable Market: Absorbs the market cap of legacy stables and traditional money market funds.

A major slashing event on a foundational L1 like Ethereum could simultaneously depeg multiple LST-backed stablecoins, creating a correlated devaluation spiral.\n- Risk: A >5% slashing penalty on a major LST like stETH could trigger a $5B+ capital shortfall across protocols.\n- Solution: Protocols like EigenLayer and Babylon are creating slashing insurance pools and diversified validator sets to isolate and socialize this tail risk.

LSTs derive liquidity from their underlying DEX pools, which can evaporate during market stress, making stablecoin redemptions impossible.\n- Risk: A bank-run scenario on a stablecoin like USDe could drain Curve/Uniswap pools, causing the LST collateral to trade at a >10% discount to NAV.\n- Solution: Native yield must fund deep, permissionless liquidity backstops. Protocols like Mellow Finance and Aerodrome are building ve(3,3) flywheels to incentivize permanent LP capital.

All LST-backed stablecoins are critically dependent on price oracles (Chainlink, Pyth). A manipulation or failure here is a single point of failure.\n- Risk: A flash loan attack manipulating the stETH/USD oracle by 5-10% could allow an attacker to mint unlimited, undercollateralized stablecoin debt.\n- Solution: Moving beyond spot price feeds to TWAP oracles and proof-of-reserve attestations (e.g., Lagrange's ZK proofs of state) for real-time collateral verification.

Regulators (SEC) may classify high-yield, LST-backed stablecoins as unregistered securities, forcing mass redemptions and killing composability.\n- Risk: A Howey Test determination against yield-bearing stable assets could force walled-garden compliance and fragment DeFi liquidity.\n- Solution: Architecting stablecoins as non-yield-bearing claim tickets on a segregated treasury, separating the regulatory asset (the stablecoin) from the yield-bearing asset (the LST), as seen in MakerDAO's Endgame Plan.

Stablecoin demand is pro-cyclical: high yield attracts capital in bull markets, but evaporating yield in bear markets triggers redemptions and deleveraging.\n- Risk: A sustained drop in Ethereum staking yield below 2% could trigger a cascade of redemptions from yield-chasing capital, forcing liquidations.\n- Solution: Diversifying yield sources beyond pure consensus rewards to include MEV sharing, restaking rewards (EigenLayer), and real-world asset yields to create a more stable APR floor.

LSTs like stETH are the base collateral layer for the entire DeFi stack. A failure in one major LST-backed stablecoin protocol could cascade through Aave, Compound, and Frax Finance.\n- Risk: A depeg event becomes a cross-protocol insolvency event due to rehypothecation, similar to the UST collapse but with a more fundamental asset.\n- Solution: Implementing circuit breakers, debt ceiling isolation per collateral type, and real-time risk dashboards (like Gauntlet) to monitor inter-protocol exposure concentrations.

Traditional stablecoin collateral (e.g., US Treasuries) earns yield off-chain, creating a $10B+ annual revenue gap for protocols. This is a massive, untapped native yield source.

• Key Benefit: Convert dead collateral into productive assets
• Key Benefit: Generate protocol-owned revenue to fund growth and sustainability

Liquid Staking Tokens (LSTs) like Lido's stETH, Rocket Pool's rETH, and EigenLayer's restaked assets provide a trust-minimized, high-liquidity yield base. They are the only asset class with native yield, deep liquidity, and composable security.

• Key Benefit: Unlocks 4-6% native APY for backing stablecoins
• Key Benefit: Creates a reflexive flywheel: more stablecoin demand → more staking demand → stronger network security

Maker's shift to Ethena's sUSDe and planned Spark Protocol SubDAOs is the canonical case study. It's not just about backing—it's about building an entire yield-bearing monetary layer where stability is derived from delta-neutral hedging and staking rewards.

• Key Benefit: Hedged yield transforms volatile crypto assets into stable collateral
• Key Benefit: SubDAO model allows for specialized, risk-isolated vaults for different LSTs

LST-backed systems are only as strong as their price and liquidity oracles. A flash loan attack or oracle manipulation on a major LST could cascade through the entire stablecoin system, as seen in past DeFi exploits.

• Key Benefit: Designing with Pyth Network or Chainlink's CCIP for robust data
• Key Benefit: Implementing circuit breakers and multi-oracle fallbacks is non-negotiable

Don't build a monolithic stablecoin. Build a collateral management hub that can onboard any yield-bearing asset. Use EigenLayer for cryptoeconomic security and Layer 2s like Arbitrum or Base for scaling settlement and liquidations.

• Key Benefit: Future-proofs protocol against next-gen LSTs (e.g., restaked LSTs)
• Key Benefit: Isolates risk and allows for optimized execution on fast, cheap L2s

The stablecoin itself becomes a yield-bearing money market fund. Competition shifts from 'most stable' to 'highest safe yield'. This is the convergence of MakerDAO, Aave, and Lido into a single primitive.

• Key Benefit: User acquisition via yield, not just stability
• Key Benefit: Captures the entire DeFi yield stack in one user-facing asset