LSTs are superior collateral. They are native, yield-bearing assets with deep liquidity and predictable risk profiles, unlike the volatile, synthetic, or bridged assets that dominate current lending pools. This makes them the optimal base layer for credit.
liquid-staking-and-the-restaking-revolution
Blog
Why Liquid Staking Tokens Will Become the New Money Market Instruments
An analysis of how LSTs, with their native yield and composability, are structurally superior to traditional repos and are being adopted as the foundational collateral asset for on-chain institutional portfolios.
introduction
THE COLLATERAL SHIFT
Introduction
Liquid staking tokens (LSTs) are evolving from simple yield assets into the foundational collateral for a new generation of DeFi money markets.
Yield transforms the lending model. Traditional money markets like Aave and Compound treat yield as an external reward. LST-backed markets, as seen with EigenLayer restaking or Morpho Blue LST vaults, bake the native staking yield directly into the collateral's value, creating intrinsically positive carry positions.
The data confirms the shift. LSTs like Lido's stETH and Rocket Pool's rETH already represent over $50B in TVL. Their integration as primary collateral in protocols like Aave V3 and MakerDAO's DAI minting is not a feature—it is the new standard for capital efficiency.
key-trends
WHY LSTs ARE THE NEW MONEY
The Inevitable Shift: Three Structural Trends
The evolution from passive collateral to programmable, yield-bearing assets is restructuring DeFi's financial plumbing.
01
The Problem: Idle Collateral
Traditional DeFi lending locks up high-value assets like ETH, creating massive opportunity cost. This is a $30B+ inefficiency in TVL.\n- Stagnant Capital: Collateral earns zero yield while borrowed.\n- Protocol Risk: Lenders bear smart contract risk for minimal returns.
0%
Yield on Locked ETH
$30B+
Inefficient TVL
02
The Solution: LSTs as Yield-Bearing Base Money
Liquid Staking Tokens (LSTs) like Lido's stETH and Rocket Pool's rETH transform staked ETH into composable, interest-bearing collateral.\n- Native Yield: Collateral automatically accrues staking rewards (~3-5% APY).\n- Capital Efficiency: Enables recursive strategies (e.g., stake -> borrow -> stake) without sacrificing base yield.
3-5%
Native APY
>2x
Capital Efficiency
03
The Network Effect: LSTs as the Universal Reserve Asset
LSTs are becoming the preferred collateral across Aave, Compound, and EigenLayer, creating a flywheel.\n- Deepest Liquidity: LSTs offer superior liquidity vs. native assets on DEXs like Uniswap.\n- Risk Standardization: Protocols can optimize for a single, yield-bearing asset class, simplifying risk models and integrations.
$50B+
Combined LST TVL
#1
Collateral Type
deep-dive
THE MONEY MARKET EVOLUTION
From Repo to Restake: The Technical Superiority of LSTs
Liquid Staking Tokens (LSTs) are structurally superior to traditional repo collateral, creating the foundation for the next generation of on-chain money markets.
LSTs are programmable collateral. Unlike static repo assets, LSTs like Lido's stETH and Rocket Pool's rETH are bearer instruments with native yield. This composability allows them to be simultaneously staked and used as collateral in protocols like Aave and MakerDAO, a feat impossible with traditional finance's rehypothecation.
The yield is trust-minimized and verifiable. LST yields are generated by Ethereum's consensus layer, not a bank's balance sheet. This creates a risk-free rate that is transparent and cryptographically proven, eliminating counterparty risk inherent in the traditional repo market.
LSTs enable reflexive leverage cycles. Protocols like EigenLayer use LSTs for restaking, allowing the same capital to secure multiple services. This creates a capital efficiency multiplier that traditional money markets, constrained by legal entity separation, cannot replicate.
Evidence: The Total Value Locked (TVL) in liquid staking protocols exceeds $50B, dwarfing the on-chain DeFi repo market and demonstrating clear market preference for this superior primitive.
WHY LSTs ARE THE NEW MONEY MARKET
The Collateral Hierarchy: LSTs vs. Traditional Instruments
A first-principles comparison of collateral efficiency, risk, and composability between Liquid Staking Tokens and traditional money market instruments.
| Feature / Metric | Liquid Staking Tokens (e.g., stETH, rETH) | Traditional Money Market (e.g., USDC, DAI) | Yield-Bearing Stablecoins (e.g., sDAI, USDY) |
|---|---|---|---|
Underlying Yield Source | Native blockchain staking (e.g., Ethereum consensus) | Over-collateralized lending (e.g., Aave, Compound) | Off-chain treasuries or on-chain lending pools |
Base Yield (APY, Approx.) | 3-5% (Ethereum) | 2-8% (variable, credit-dependent) | 4-7% (protocol-dependent) |
Collateral Efficiency in DeFi | |||
Native Composability (Restaking, LRTs) | |||
Counterparty / Credit Risk | Protocol slashing risk | Borrower default, smart contract risk | Issuer solvency, reserve custody risk |
Liquidity Depth (TVB, est.) | $40B+ (Lido, Rocket Pool) | $15B+ (Aave, Compound) | $2B+ (Maker, Ondo) |
Settlement Finality | On-chain, near-instant | On-chain, near-instant | Varies (on-chain wrapper, off-chain settlement) |
Regulatory Clarity | Evolving (potential security concerns) | Evolving (money transmitter laws) | High risk (potential unregistered securities) |
protocol-spotlight
FROM YIELD TO COLLATERAL
Architecting the New System: Key Protocol Implementations
Liquid Staking Tokens (LSTs) are evolving beyond simple yield-bearing assets into the foundational collateral layer for a new financial system.
01
The Problem: Idle Capital in Staking
Traditional staking locks capital, creating a massive opportunity cost. This $100B+ asset class is illiquid, preventing its use in DeFi's composable money markets.
- Capital Inefficiency: Locked ETH cannot be used for lending, leverage, or payments.
- Yield Fragmentation: Staking yield is isolated from the broader DeFi yield curve.
$100B+
Locked Capital
0%
DeFi Utility
02
The Solution: LSTs as Universal Collateral
Protocols like Aave, Compound, and Morpho are integrating LSTs as primary collateral, treating them as superior to native assets.
- Higher Capital Efficiency: LSTs accrue yield while being used as collateral, enabling recursive strategies.
- Risk-Adjusted Returns: LSTs offer a ~3-5% native yield floor, making them safer, yield-bearing base collateral than volatile assets.
3-5%
Yield Floor
2x+
Utility
03
The Mechanism: LST-Backed Stablecoin Issuance
Projects like Ethena (synthetic dollars) and Lybra Finance (pegged stablecoins) use LSTs as the reserve asset to mint yield-generating stablecoins.
- Yield-Bearing Money: Created stablecoins inherit the LST's staking yield, creating a native positive carry asset.
- Systemic Leverage: This creates a new credit layer atop the staking economy, amplifying its financial utility.
$2B+
TVL in LST-Fi
15-20%
APY Strategies
04
The Endgame: LSTs Displace Traditional Money Markets
The composability of LSTs will make them the default risk-free asset in crypto, outcompeting isolated lending pools.
- Unified Yield Curve: LST yield becomes the benchmark rate, with protocols like MakerDAO and Spark using it for monetary policy.
- Network Effects: As LST utility grows, its liquidity premium increases, creating a virtuous cycle that centralizes liquidity and trust.
Benchmark
Rate
$500B+
Potential TVL
counter-argument
THE RISKS
The Bear Case: Slashing, Centralization, and Regulatory Fog
Liquid staking's path to becoming a monetary primitive is obstructed by systemic slashing risks, validator centralization, and an unresolved regulatory status.
Slashing risk is systemic. LSTs are not risk-free yield. A major slashing event on a dominant protocol like Lido or Rocket Pool would trigger a depeg cascade, eroding the foundational trust required for a monetary instrument. The yield is compensation for this tail risk.
Centralization begets fragility. The dominance of a few large node operators for Lido or Coinbase's cbETH creates a single point of failure. This concentration undermines the censorship-resistance and decentralization that give crypto-native money its value proposition versus traditional finance.
Regulatory fog chills innovation. The SEC's stance on staking-as-a-service and the ambiguous status of staking rewards creates legal uncertainty. This prevents institutional adoption and the development of robust LST-based DeFi primitives on chains like Ethereum and Solana.
Evidence: Lido commands over 30% of staked ETH, creating a 'too-big-to-fail' dynamic. A 2023 slashing event on the Cosmos Hub, while small, demonstrated the market's sensitivity to validator failure.
takeaways
LSTs AS MONEY MARKETS
TL;DR for CTOs and Capital Allocators
Liquid Staking Tokens (LSTs) are evolving from simple yield tokens into the foundational collateral and liquidity layer for DeFi 2.0.
01
The Problem: Idle Capital in Staking
Traditional staking locks up ~$100B+ in capital, creating massive opportunity cost. This illiquidity is the primary friction preventing institutional adoption and efficient capital deployment.
- Capital Inefficiency: Staked ETH earns ~3-4% APY but cannot be used elsewhere.
- Risk Concentration: Validators face slashing risk with zero hedging or diversification options.
$100B+
Locked Capital
0%
Reusable
02
The Solution: Programmable Yield-Bearing Collateral
LSTs like Lido's stETH and Rocket Pool's rETH transform staked assets into fungible, composable tokens. They are the native yield-bearing asset class for DeFi, superior to static stablecoins.
- Native Yield: LSTs accrue staking rewards automatically, acting as a positive-carry asset.
- Composability: Enables use as collateral in Aave, MakerDAO, and Compound while still earning base-layer yield.
3-5%
Base Yield
10x+
More Utility
03
The Mechanism: LSTs as the Ultimate Money Legos
LSTs enable recursive financial strategies impossible with traditional finance or simple staking. They create a flywheel for capital efficiency.
- Collateral Stacking: Borrow stablecoins against LSTs to farm additional yield in Curve/Convex pools.
- Derivative Foundation: LSTs are the underlying for perp DEXs like dYdX and structured products from Ribbon Finance.
50-80%
LTV Ratios
15%+
Total Yield
04
The Endgame: LSTs Displace Traditional Repo Markets
The liquidity and trust-minimized settlement of LSTs will absorb the $4T+ traditional repo market. Protocols like EigenLayer add restaking yield, creating a superior risk-adjusted return profile.
- Institutional Gateway: LSTs offer 24/7 settlement and transparent on-chain audit trails.
- Yield Aggregation: Combines staking, restaking, and DeFi yields into a single, tradable instrument.
$4T+
Market Addressable
24/7
Settlement
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