Native tokens (e.g., ETH, SOL) excel at providing maximum security and protocol alignment because they represent direct, unencumbered ownership of the base layer. For example, using ETH as collateral on Aave or MakerDAO offers the highest loan-to-value (LTV) ratios and deepest liquidity, with over $20B in ETH locked across major lending markets. Their value is tied directly to the underlying blockchain's security and utility, making them the least correlated and most resilient collateral type during systemic stress.
LABS
Comparisons
Native Tokens vs Liquid Staking Tokens (LSTs) as Collateral
A technical comparison for CTOs and protocol architects evaluating capital efficiency, risk exposure, and yield optimization in over-collateralized lending systems like Aave, Compound, and Euler.
Chainscore © 2026
introduction
THE ANALYSIS
Introduction: The Collateral Efficiency Frontier
A data-driven comparison of native tokens and Liquid Staking Tokens (LSTs) for optimizing capital efficiency in DeFi protocols.
Liquid Staking Tokens (e.g., stETH, jitoSOL) take a different approach by unlocking the yield-generating potential of staked assets. This strategy results in a trade-off: you gain productive capital (earning staking rewards while the asset is deployed elsewhere) but introduce smart contract and slashing risks from the LST provider (like Lido or Marinade). Protocols like EigenLayer and MarginFi are built specifically to leverage this dual utility, but LSTs often have slightly lower LTVs than their native counterparts due to these added risk layers.
The key trade-off: If your priority is maximum security, simplicity, and the highest borrowing power, choose native tokens. If you prioritize capital efficiency and yield stacking, and can accept the additional smart contract dependency, choose LSTs. The decision hinges on whether you value pure collateral strength or are willing to trade a marginal amount of safety for compounded returns.
tldr-summary
Native Tokens vs Liquid Staking Tokens (LSTs)
TL;DR: Key Differentiators at a Glance
A direct comparison of core trade-offs for CTOs and architects evaluating collateral options for DeFi protocols.
01
Native Token Strength: Protocol Security
Direct validator slashing: Collateral is natively slashable, providing the highest security guarantee for protocols like Aave and Compound. This matters for foundational lending markets where minimizing systemic risk is paramount.
02
Native Token Strength: Capital Simplicity
No dependency risk: Avoids exposure to LST issuer smart contract risk (e.g., Lido's stETH, Rocket Pool's rETH). This matters for protocols prioritizing minimal external dependencies and attack surface reduction.
03
LST Strength: Capital Efficiency
Dual yield generation: LSTs like stETH and cbETH accrue staking yield while being used as collateral. This matters for maximizing user APY and improving TVL stickiness in yield-aggregating protocols like EigenLayer and Pendle.
04
LST Strength: Liquidity & Composability
Deep DeFi integration: Major LSTs have established liquidity pools on Uniswap V3, Curve, and Balancer, and are widely accepted as collateral. This matters for protocols requiring high leverage loops, easy exits, and seamless integration with the existing DeFi stack.
NATIVE TOKENS VS. LIQUID STAKING TOKENS (LSTS)
Head-to-Head Feature Matrix
Direct comparison of key technical and economic attributes for collateral selection in DeFi.
| Metric | Native Tokens (e.g., ETH, SOL) | Liquid Staking Tokens (e.g., stETH, mSOL) |
|---|---|---|
Capital Efficiency | 1x (staked capital is locked) |
|
Base Yield (APY) | 4-6% (network consensus reward) | 3-5% (net of protocol fee) |
Slashing Risk Exposure | ||
DeFi Composability | ||
Protocol Dependencies | Native blockchain only | Staking provider (e.g., Lido, Marinade) |
Typical Collateral Factor (Aave, Compound) | 70-80% | 60-75% |
Secondary Market Liquidity | Primary CEX/DEX pairs | DEX pools (e.g., Curve, Uniswap) |
pros-cons-a
NATIVE TOKENS VS LIQUID STAKING TOKENS (LSTS)
Native Token (e.g., ETH, SOL) as Collateral: Pros & Cons
A direct comparison of the two primary collateral assets for DeFi lending and borrowing, focusing on risk, yield, and protocol integration.
01
Native Token (e.g., ETH) - Key Strengths
Maximum Security & Simplicity: Native tokens are the base asset of their respective chains, eliminating smart contract risk from a staking derivative layer. This is critical for risk-averse treasuries or overcollateralized stablecoin protocols like MakerDAO's DAI (backed by ~$10B in ETH).
- No Depeg Risk: Immune to the staking derivative's price diverging from the underlying asset.
- Universal Acceptance: Every lending market (Aave, Compound) and DEX (Uniswap, Curve) supports the native asset as core collateral.
02
Native Token (e.g., ETH) - Key Weaknesses
Opportunity Cost & Capital Inefficiency: Locking native tokens in a lending vault forfeits staking rewards (~3-5% APY on Ethereum). For a $10M collateral position, this represents $300K-$500K in annual foregone yield. This is a major drawback for yield-optimizing hedge funds or protocols seeking revenue from their treasury assets. The collateral is also single-purpose, unable to simultaneously secure the network and generate DeFi yield.
03
Liquid Staking Token (e.g., stETH, mSOL) - Key Strengths
Dual Yield & Capital Efficiency: LSTs like Lido's stETH ($30B+ TVL) allow collateral to earn staking yield (e.g., 3.5% on Ethereum) while being used for lending/borrowing or LP provision. This creates a composite yield, essential for yield aggregators (Yearn) and high-leverage strategies on platforms like Aave (where stETH is a top collateral asset).
- Protocol Integration: Major DeFi protocols have deep liquidity and optimized risk parameters for top-tier LSTs.
04
Liquid Staking Token (e.g., stETH, mSOL) - Key Weaknesses
Smart Contract & Depeg Risk: LSTs add a layer of risk from the staking provider's smart contracts (e.g., Lido, Marinade). Historical events like the UST depeg have made protocols wary. Aave's risk parameters for stETH are stricter (lower Loan-to-Value) than for native ETH.
- Centralization Concerns: Top LSTs often concentrate stake with a few node operators, a concern for decentralization-maximalist protocols. This can lead to governance attacks or slashing risks that affect the derivative's value.
pros-cons-b
NATIVE TOKENS VS LIQUID STAKING TOKENS (LSTS)
Liquid Staking Token (e.g., stETH, mSOL) as Collateral: Pros & Cons
Key strengths and trade-offs at a glance for protocol architects designing lending markets or structured products.
01
Native Token Pros: Direct Protocol Security
Direct staking and governance: Using ETH or SOL directly as collateral ties capital to the underlying network's security and consensus. This matters for protocols like Aave or Compound where collateral stability is paramount. It avoids dependency on third-party LST providers like Lido or Marinade.
02
Native Token Cons: Capital Inefficiency
Opportunity cost of locked yield: Staked native tokens (e.g., validator-bound ETH) are illiquid and earn no yield while used as collateral. This creates a significant drag for users, especially with Ethereum's ~4% APR. Protocols like MakerDAO face challenges attracting capital against idle staked positions.
03
LST Pros: Yield-Bearing Collateral
Dual utility of capital: Assets like Lido's stETH or Jito's jitoSOL accrue staking rewards while being used as collateral. This matters for maximizing capital efficiency in DeFi loops. Protocols like Aave V3 and Euler Finance enable borrowing against stETH, letting users leverage their staked position.
04
LST Cons: Smart Contract & Depeg Risk
Added layer of protocol risk: LSTs introduce dependency on their issuing platform's security (e.g., Lido's 30+ node operators). A bug or slashing event could cause a depeg from the underlying asset, as seen in minor stETH deviations. This requires robust oracle setups (Chainlink, Pyth) and higher liquidation buffers.
05
LST Pros: Enhanced Liquidity & Composability
Deep integration across DeFi: Major LSTs like stETH and rETH are integrated into dozens of protocols (Curve pools, Balancer vaults, Convex), creating deep liquidity. This matters for protocols seeking highly liquid collateral that can be easily swapped or used in money markets like Compound.
06
LST Cons: Centralization & Governance Risk
Concentration in a few providers: Lido dominates Ethereum LSTs with ~30% of staked ETH, creating systemic risk. Governance decisions (e.g., fee changes, upgrade paths) by DAOs like LidoDAO or Marinade DAO can impact collateral value. This is a key concern for risk-averse institutional integrators.
CHOOSE YOUR PRIORITY
Decision Framework: When to Choose Which
Native Tokens for DeFi
Verdict: The bedrock for maximum security and capital efficiency in core money markets. Strengths: Native tokens (e.g., ETH, SOL) provide the highest collateral factor (often 80-90%) in protocols like Aave and Compound, as they carry zero smart contract risk beyond the underlying chain. They are the most capital-efficient asset for borrowing, enabling the deepest liquidity pools. Their price is a direct proxy for chain security, making them the least correlated to LST-specific depeg risks. Weaknesses: Capital is locked and unproductive while used as collateral, creating a significant opportunity cost versus staking yields.
Liquid Staking Tokens for DeFi
Verdict: Essential for composability and yield-bearing collateral, but introduces new risk vectors. Strengths: LSTs (e.g., stETH, jitoSOL) unlock composability, allowing users to earn staking yield while simultaneously participating in DeFi. Protocols like MakerDAO and Aave V3 accept major LSTs with high collateral factors (e.g., 75-85% for stETH). They are the foundation for restaking ecosystems like EigenLayer, creating additional yield opportunities. Weaknesses: Carry smart contract risk from the liquid staking protocol (e.g., Lido, Rocket Pool) and liquidity risk if the LST depegs from the native asset, as seen in extreme market events. Collateral factors are typically 5-10% lower than for the native token.
COLLATERAL ANALYSIS
Technical Deep Dive: Oracle Risk & Depeg Scenarios
A critical examination of the systemic risks and failure modes when using native assets versus liquid staking tokens (LSTs) as collateral in DeFi protocols like Aave, MakerDAO, and Compound.
Native tokens are fundamentally more resistant to oracle failure. Their price is typically derived from a broad market consensus across centralized exchanges (CEXs) like Binance and Coinbase, making them harder to manipulate. LSTs like stETH or rETH add a layer of complexity; their price depends on both the underlying asset's oracle and the staking derivative's peg mechanism. A failure in the LST's specific redemption oracle (e.g., Lido's stETH:ETH price feed) can create a depeg even if ETH's price is accurate.
verdict
THE ANALYSIS
Verdict & Strategic Recommendation
A final assessment of the core trade-offs between native tokens and Liquid Staking Tokens for collateralization.
Native Tokens (e.g., ETH, SOL) excel at providing maximum capital efficiency and protocol security alignment because they are the foundational asset of their respective networks. For example, using native ETH as collateral in MakerDAO or Aave offers the deepest liquidity, lowest liquidation risk premiums, and directly secures the underlying chain. This is evidenced by the fact that over 70% of DeFi's total value locked (TVL) is in native assets, highlighting their entrenched trust and utility.
Liquid Staking Tokens (e.g., stETH, jitoSOL) take a different approach by unlocking yield-bearing capital. This strategy results in a powerful trade-off: you gain staking rewards (e.g., ~3-5% APY on Ethereum) and enhanced composability across DeFi, but introduce smart contract and slashing risk from the LST provider. The success of Lido's stETH, with a market cap exceeding $30B, demonstrates massive demand for this yield-generating collateral, though it creates a dependency layer.
The key trade-off is between pure capital efficiency/security and yield-generating utility. If your protocol's priority is minimizing risk, maximizing borrow power, and maintaining the simplest security model, choose Native Tokens. If you prioritize maximizing user returns, enabling complex yield strategies, and are comfortable managing the additional smart contract and centralization risks of an LST provider, choose Liquid Staking Tokens. The decision fundamentally hinges on whether you view collateral as a static security deposit or a dynamic, productive asset.
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