LST for Governance Token Collateralization vs Native Stake for Governance Token Collateralization

Unlocks DeFi Composability: LSTs like Lido's stETH ($35B+ TVL) or Rocket Pool's rETH can be simultaneously used as collateral in lending markets (Aave, Compound) while still earning staking yield. This maximizes capital utility and user retention.

Key Metric: Protocols like Lyra Finance use stETH as collateral, enabling leveraged options strategies without sacrificing staking rewards.

Eliminates Smart Contract & Slashing Risk: Native stake (e.g., directly staked ETH, SOL, or ATOM) relies solely on the base layer's consensus security. There is no dependency on LST provider slashing risk or bridge vulnerabilities.

Key Metric: Protocols like Osmosis use natively staked ATOM for governance, ensuring collateral security is identical to the Cosmos Hub's $3B+ staked value.

Avoids Unbonding Periods: LSTs provide instant liquidity. Users can deposit stETH immediately, bypassing Ethereum's 1-2 week unbonding delay or Cosmos' 21-day period. This drastically improves UX for governance participation.

Use Case: A DAO requiring rapid treasury diversification or a voting vault that needs agile capital allocation benefits from this liquidity.

Avoids Third-Party Dependencies: Using native stake prevents governance capture or systemic risk from a dominant LST provider (e.g., Lido's 30%+ Ethereum stake). The protocol maintains full control over its collateral stack.

Trade-off: This often requires building custom staking interfaces or accepting lower initial TVL due to higher user friction.

Simultaneous utility: LSTs like Lido's stETH or Rocket Pool's rETH can be used as collateral in DeFi (e.g., Aave, Maker) while still earning staking rewards (~3-5% APY). This unlocks leveraged governance positions without sacrificing yield.

Deep integration: LSTs are standardized ERC-20s, enabling seamless use across DEXs (Uniswap), money markets, and derivative protocols. This provides an instant exit for governance token positions, unlike locked native stake.

Direct slashing risk: Collateralizing natively staked assets (e.g., ETH on EigenLayer, SOL on Marinade) directly ties the governance position to the underlying chain's security. This creates stronger alignment and disincentivizes malicious voting.

No middle-layer risk: Avoids dependency on LST protocols (e.g., Lido DAO governance, oracle failures). Eliminates LST-specific fees (~10% of staking rewards) and reduces smart contract attack surface for the core collateral.

Additional trust assumptions: Relies on the LST provider's security and oracle accuracy. Events like the stETH depeg in June 2022 demonstrate vulnerability to market panic, potentially triggering unwanted liquidations of governance positions.

Capital lock-up: Native stake often has unbonding periods (e.g., 7-28 days on Ethereum, 2-3 days on Cosmos). This creates significant opportunity cost and illiquidity, making governance positions difficult to adjust quickly.

Direct slashing risk: Collateral is the protocol's own bonded stake, creating perfect alignment between governance power and economic security. This matters for sovereign chains (e.g., Cosmos Hub ATOM) where governance directly controls core parameters and security is non-negotiable.

No dependency risk: Eliminates reliance on external LST protocols (like Lido, Rocket Pool) and their governance, oracle, or smart contract risks. This matters for protocols prioritizing minimal attack surface and avoiding systemic risks from LST de-pegs or failures.

Unlocked liquidity: Users can participate in governance while their staked assets (e.g., stETH, rETH) are simultaneously used in DeFi (Aave, Curve). This matters for Ethereum L2s or appchains (e.g., using stETH as collateral for a governance token) seeking higher TVL and user adoption by solving the liquidity-staking trilemma.

Lower barrier to entry: Users can collateralize with existing LST holdings without unbonding periods (e.g., 21-day Ethereum, 28-day Cosmos). This matters for growth-focused DAOs that want to attract capital from large, established LST pools (~$40B+ TVL in Ethereum LSTs) and enable yield stacking (staking + governance rewards + DeFi yield).

Liquidity lock-up: Tying governance power to illiquid, bonded assets reduces voter participation and flexibility. This matters for highly active DAOs (e.g., Maker, Uniswap) where frequent, informed voting is required, as users may be unwilling to lock capital for long durations.

Introduces new attack vectors: Relies on the security of the LST's oracle and minting contract. A de-peg event (e.g., minor stETH de-peg in 2022) could destabilize the governance system. This matters for protocols where collateral stability is critical, requiring robust price feed integration and contingency plans.