LST for Borrowing Power vs Native Stake for Borrowing Power

Immediate DeFi Composability: LSTs like Lido's stETH or Rocket Pool's rETH can be deposited into lending markets (Aave, Compound) and money markets (Euler, Morpho) simultaneously, enabling leveraged staking strategies. This matters for protocols and users seeking to maximize yield on a single capital base.

Deep Secondary Markets: LSTs trade on DEXs like Uniswap and Curve, providing instant exit liquidity. This matters for borrowers who may need to quickly adjust positions or face liquidation, as selling an LST is faster and cheaper than unbonding natively staked assets.

No Counterparty or Protocol Risk: Staking directly with the network consensus (e.g., Ethereum validators) eliminates risks associated with LST providers (smart contract bugs, governance attacks). This matters for institutions and conservative stakers where asset preservation is the top priority.

No Middleware Dependencies: Your yield and slashing conditions are governed solely by the base protocol (e.g., Ethereum's Beacon Chain). This matters for long-term holders who prefer a set-and-forget strategy without monitoring LST peg stability or liquidity pool health.

Simultaneous yield and collateralization: LSTs like Lido's stETH and Rocket Pool's rETH allow you to earn staking rewards while using the token as collateral for loans on Aave or Compound. This unlocks 100%+ capital efficiency compared to a locked native stake. Critical for active treasury management and leveraged yield strategies.

No unbonding period: LSTs can be sold or swapped instantly on DEXs like Uniswap or Curve, providing immediate exit liquidity. This reduces liquidation risk in volatile markets, as you can sell the LST to repay debt rather than waiting 7-28 days for an unstake. Essential for protocols requiring agile risk management.

Higher Loan-to-Value (LTV) ratios: Native staked assets (e.g., ETH staked directly) often receive more favorable collateral factors on specialized platforms like EigenLayer or native restaking protocols. This can mean ~90% LTV vs ~70% for LSTs, allowing for larger loan sizes against the same underlying value. Best for maximizing leverage on a core position.

Direct network alignment: Native staking directly secures the base layer (Ethereum) and may qualify for exclusive rewards like MEV or priority fees, which are not always fully passed through to LST holders. This avoids counterparty risk associated with LST providers and is the preferred choice for foundations and long-term, security-focused holders.

Liquidity & Composability: LSTs like Lido's stETH or Rocket Pool's rETH can be used simultaneously as collateral on Aave/Compound and in yield-bearing strategies. This unlocks leveraged staking loops and immediate access to capital without an unbonding period. This matters for protocols requiring high TVL efficiency and active treasury management.

Risk Transfer: The slashing risk for validator misbehavior is borne by the LST provider's node operators and insurance pools (e.g., Lido's Staking Router, Rocket Pool's RPL backing). This provides a more predictable collateral value for borrowers, crucial for risk-averse institutions managing large, stable loan positions.

No Middleman Fees: Direct stakers earn the full protocol staking yield (e.g., ~3-4% on Ethereum) without paying LST provider fees (typically 5-10% of yield). This matters for maximizing long-term yield on collateral and maintaining full control over validator keys, appealing to sovereign entities and large holders.

Intrinsic Value: 1 native staked ETH = 1 ETH at withdrawal. There is no secondary market or liquidity pool risk, eliminating concerns about LST depeg events (e.g., stETH/ETH trading at a discount). This is critical for ultra-conservative collateral backing or protocols that cannot tolerate any principal volatility beyond the underlying asset.

Yield Dilution & Centralization: LSTs introduce smart contract risk (e.g., Lido's 2021 stETH bug) and reliance on a centralized provider's oracle and governance. The convenience fee (e.g., Lido's 10%) directly reduces yield. This is a significant trade-off for purists prioritizing decentralization and minimizing counterparty risk.

Illiquidity Cost: Native-staked assets are locked for the protocol's unbonding period (e.g., Ethereum's ~27 days). This represents a massive opportunity cost, making capital unavailable for sudden market opportunities or emergency liquidity. This is a deal-breaker for active DeFi strategies or protocols requiring agile treasury management.