Why LSTs Are the Linchpin of the Next-Gen Reserve Engine

Native staking locks capital, killing composability and fragmenting DeFi liquidity. A validator's $32 ETH is a dead asset for everyone else, creating a massive opportunity cost and systemic fragility.

• $100B+ in non-productive, locked capital
• Zero utility for DeFi's lending/borrowing/lego primitives
• Creates liquidity silos between staking and DeFi ecosystems

LSTs like Lido's stETH and Rocket Pool's rETH transform locked stake into a fungible, yield-generating asset. This creates a foundational layer for a new reserve engine.

• 4-5% native yield is baked into the token's rebasing or appreciation
• Unlocks >$30B TVL for use in AMMs (Curve, Balancer) and money markets (Aave, Compound)
• Enables recursive yield strategies and capital-efficient leverage

Protocols like EigenLayer and ether.fi use LSTs to bootstrap cryptoeconomic security for new networks (AVSs, rollups). This creates a demand flywheel for the underlying LST.

• Restaking amplifies yield and utility of the base LST (e.g., stETH -> eETH)
• Creates synergistic demand: more AVSs = more restaking = higher LST value capture
• Turns passive collateral into active security capital for the modular stack

Dominance by a few LST providers (Lido ~30% of staked ETH) creates centralization vectors and tail risks. A failure in a major LST could cascade through the entire DeFi system built atop it.

• Protocol risk: Smart contract bugs or governance attacks on issuers like Lido
• Liquidity risk: de-peg events (e.g., stETH/ETH on Curve during Terra collapse)
• Demands robust, decentralized LST designs and over-collateralized backing

The endgame isn't just DeFi collateral—it's a unified reserve asset for cross-chain settlement. Projects like LayerZero's OFT and Circle's CCTP are enabling native LST transfers, making yield-bearing liquidity the default.

• Cross-chain LSTs (stETH on Arbitrum, Solana) reduce bridging friction
• Enables yield-bearing stablecoin collateral (e.g., USDC minted against stETH)
• Positions LSTs as the base money layer for a multi-chain economy

The true north star shifts from Total Value Locked (TVL) to Total Value Secured. This measures the economic security an LST provides to its underlying chain and the broader ecosystem it restakes into.

• TVS = Staked Value + Restaked Value + Secured Rollup Value
• Aligns LST growth with network security and scalability
• Captures the full-stack economic gravity of the reserve asset

The Problem: New protocols (AVSs) need their own decentralized security, a costly and slow bootstrapping process. The Solution: EigenLayer enables the re-staking of ETH/LSTs to secure a marketplace of external systems, from oracles to new L2s. This monetizes idle security and creates a flywheel for innovation.

• $16B+ TVL secured for Actively Validated Services (AVSs).
• Unlocks native yield + AVS rewards on the same capital.

The Problem: Stablecoins are either centralized (USDC) or capital-inefficient (overcollateralized DAI). The Solution: USDe uses stETH as delta-neutral collateral, pairing it with short ETH futures to create a scalable, crypto-native stablecoin. This turns staking yield into a foundational monetary primitive.

• $2B+ Supply backed by stETH and derivatives.
• Generates yield from staking + futures basis.

The Problem: LST yield is locked and unpredictable, limiting its utility as a financial asset. The Solution: Pendle separates LST principal from future yield, creating tradable yield tokens (YT) and principal tokens (PT). This enables leveraged yield farming, hedging, and fixed-income markets.

• $5B+ in cumulative volume for yield trading.
• Enables fixed-rate borrowing against future staking rewards.

The Problem: Lending markets are monolithic and inefficient, with one risk curve for all collateral types. The Solution: Morpho Blue's isolated market architecture allows for hyper-optimized, LST-specific lending pools. This creates superior risk/reward profiles and deeper liquidity for staked assets, fueling leveraged staking strategies.

• ~90% capital efficiency for top-tier LST collateral.
• Enables non-custodial, permissionless LST leverage.

The Problem: Yield from LSTs and other sources is fragmented and underutilized across chains. The Solution: Karak acts as a generalized restaking layer, aggregating yield from LSTs, LRTs, and LP positions to secure a cross-chain network. It abstracts yield into a universal security commodity.

• Secures bridges, oracles, and sequencers with aggregated yield.
• Multi-chain deployment from day one (Ethereum, Arbitrum, etc.).

The Problem: Restaking in EigenLayer locks LST liquidity and bundles exposure to multiple AVS risks. The Solution: Protocols like Ether.fi, Kelp DAO, and Renzo issue Liquid Restaking Tokens (eETH, KEP, ezETH). These abstract away AVS complexity, provide liquidity, and enable a second-layer DeFi ecosystem on top of restaked capital.

• $10B+ combined TVL in the LRT sector.
• Creates a derivative-on-derivative leverage point for the reserve engine.

Staked ETH is locked, creating a $100B+ deadweight opportunity cost. DeFi protocols like Aave and Compound can't leverage this capital, fragmenting liquidity and limiting leverage loops.

• Unlocks ~$30B in latent collateral for money markets.
• Enables cross-protocol capital efficiency (e.g., stETH as collateral on Aave, then used in Curve pools).
• Mitigates the security vs. utility trade-off of Proof-of-Stake networks.

LSTs transform staked assets into a composable, yield-accruing base money. This creates a native yield layer for stablecoins (like Maker's sDAI), restaking (EigenLayer), and structured products.

• Native yield backs stable assets (e.g., sDAI's ~5% backing yield).
• Serves as the canonical collateral for re-staking primitives and LSTfi.
• Enables risk-tranching and yield-optimizing Vaults (e.g., Pendle, EigenLayer).

The next layer is LSTfi—using LSTs as collateral to mint stablecoins, borrow assets, or secure external networks. This creates a recursive financial stack anchored in crypto-native yield.

• MakerDAO: Uses stETH and rswETH as primary collateral for DAI.
• EigenLayer: LSTs are the key deposit asset for Actively Validated Services (AVS).
• Lybra & Prisma: Mint yield-bearing stablecoins (e.g., peUSD) directly against LSTs.

The Lido dominance problem (~70% of staked ETH) creates systemic risk. A slashing event or oracle failure could cascade through the entire LSTfi stack. Builders must design for collateral diversity and circuit breakers.

• Mitigate with basket indices (e.g., Diva, Stader).
• Incorporate slashing insurance modules.
• Audit oracle dependencies (e.g., Chainlink, Pyth) for price feeds.

Integrate LSTs not as an afterthought, but as the primary economic engine. Design protocols where the yield is a core feature, not a side benefit.

• Vaults that auto-compound and re-stake (e.g., Kelp DAO).
• **Stablecoins with yield-streaming to holders (e.g., Ethena's USDe).
• **Lending markets with yield-adjusted LTV ratios.

LST liquidity will become omnichain. LayerZero, Axelar, and Wormhole enable staked positions to move across ecosystems. Intent-based architectures (UniswapX, Across) will allow users to stake, bridge, and deploy capital in a single transaction.

• **Unlocks multi-chain capital aggregation.
• **Enables single-transaction, cross-chain yield strategies.
• Reduces fragmentation of staking derivatives across L2s.