Staked ETH as Collateral vs Staked LSTs as Collateral: Restaking Asset Base

Direct slashing risk: Collateral value is tied directly to validator performance. This provides the highest security guarantee for protocols like EigenLayer that require cryptoeconomic security. No third-party dependencies: Eliminates smart contract risk from LST issuers (e.g., Lido, Rocket Pool). This matters for risk-averse institutional actors and foundational protocol layers.

Illiquidity during unbonding: ETH is locked for the ~7-day Ethereum withdrawal period, making it poor collateral for short-term lending or margin positions on platforms like Aave. Zero yield composability: Staking rewards are not liquid and cannot be used as separate, yield-bearing collateral. This is a critical trade-off for yield-optimizing strategies.

Instant liquidity: Tokens like stETH (Lido) or rETH (Rocket Pool) can be instantly traded or used as collateral while still accruing staking rewards. Yield-bearing collateral: The underlying staking yield automatically increases the collateral value. This is optimal for leveraged yield farming and borrowing on MakerDAO (via Spark Protocol).

Additional protocol risk: Exposure to LST issuer's smart contracts (e.g., Lido's stETH rebasing logic) and governance. The 2022 stETH depeg event demonstrated this vulnerability. Centralization vectors: Top LSTs like stETH represent significant stake concentration. This matters for protocols prioritizing decentralization and censorship resistance.

Direct Security Coupling: Native stETH is minted and slashed by the Ethereum consensus layer itself. This eliminates counterparty risk from a separate LST issuer. For protocols like EigenLayer, this means the slashing conditions for the restaked asset are natively enforced by Ethereum, providing the strongest security guarantees for high-value, permissionless AVSs.

No Double-Dilution: Stakers earn both Ethereum consensus rewards and restaking rewards on the same principal. There is no need to trade stETH for another LST, avoiding slippage and maintaining exposure to the base asset's yield. This is optimal for long-term holders and large institutional validators maximizing total return on locked ETH.

Deep Secondary Markets: LSTs like Lido's stETH and Rocket Pool's rETH trade on all major DEXs (Uniswap, Curve) and are integrated across DeFi (Aave, MakerDAO). This allows restakers to exit positions quickly or use the LST as collateral elsewhere. Critical for protocols requiring user flexibility or strategies involving leverage.

Separate Reward Streams: Holders can earn LST provider rewards (e.g., Lido staking fees, Rocket Pool RPL incentives) on top of EigenLayer restaking rewards. This creates a multi-layered yield strategy. Ideal for yield-optimizing users willing to accept the smart contract and governance risks of the LST protocol.

Direct EigenLayer Integration: Native staked ETH is the primary asset for restaking via EigenLayer. This provides first-class security guarantees and direct access to ~$20B+ in secured TVL. This matters for protocols requiring the deepest, most battle-tested security pool.

Simplified Slashing Logic: Slashing events are handled directly by the Ethereum consensus layer and EigenLayer, reducing the complexity of collateral management for AVSs (Actively Validated Services). This matters for building high-security, low-operational-overhead systems like decentralized sequencers or oracles.

Enhanced Capital Efficiency: Users can leverage LSTs already deployed in DeFi (e.g., as collateral on Aave, Maker) for restaking, avoiding capital lock-up. With ~$40B+ in LST market cap, this unlocks a massive, liquid asset base. This matters for protocols targeting yield-optimizing users and composability.

Protocol & Liquidity Diversity: Supports assets from Lido (stETH), Rocket Pool (rETH), and Coinbase (cbETH), distributing risk across multiple node operators and liquidity pools. This matters for risk-averse architectures that avoid single-provider dependency and benefit from deep secondary markets on DEXs.

Cons: Capital Lock-up & Illiquidity: Requires unbonding periods (~1-2 weeks for Lido, 28 days for Rocket Pool) to exit, making collateral temporarily illiquid. This is a poor fit for protocols requiring rapid collateral rotation or serving users with high liquidity needs.

Cons: Smart Contract & Depeg Risk: Introduces an additional layer of risk from the LST issuer's smart contracts and the potential for the LST to trade below its ETH peg during market stress. This matters for protocols where collateral stability is paramount, requiring robust risk parameter adjustments.