Liquid Staking Tokens (LSTs) like Lido's stETH, Rocket Pool's rETH, and Frax's sfrxETH excel at providing immediate liquidity and composability. By decoupling staking yield from the underlying asset, they allow users to simultaneously earn staking rewards and deploy capital in DeFi. For example, the ~$40B Total Value Locked (TVL) in LSTs across Ethereum demonstrates massive demand for this model. This creates deep, reusable liquidity layers for money markets like Aave and Compound.
LABS
Comparisons
LST in Risk-Isolated Money Markets vs Native Stake in Risk-Isolated Money Markets
A technical comparison of using Liquid Staking Tokens versus native staked assets as collateral in risk-segmented lending protocols. Analyzes composability, security, and capital efficiency trade-offs for protocol architects.
Chainscore © 2026
introduction
THE ANALYSIS
Introduction: The Core Architectural Dilemma
Choosing between LSTs and native stake for risk-isolated money markets defines your protocol's risk profile, capital efficiency, and user experience.
Native Stake Integration, as pioneered by protocols like Solana's Marginfi and Marinade, takes a different approach by allowing direct staking within the money market itself. This strategy results in a trade-off: it eliminates the smart contract and depeg risks associated with third-party LSTs but introduces more complex slashing risk management and can reduce initial capital efficiency by locking funds in the validation layer.
The key trade-off: If your priority is maximum capital efficiency and leveraging established DeFi liquidity, choose an LST-based model. If you prioritize minimizing third-party dependency and building a self-contained, validator-aligned system, choose a native stake integration. The former leverages the existing LST ecosystem's scale, while the latter offers a more purist, risk-isolated architecture.
tldr-summary
LSTs vs Native Stake
TL;DR: Key Differentiators
Core trade-offs between using Liquid Staking Tokens (LSTs) and native staked assets within risk-isolated money markets.
01
LSTs: Superior Capital Efficiency
Simultaneous Yield & Utility: LSTs like Lido's stETH, Rocket Pool's rETH, and Marinade's mSOL can be staked for consensus rewards and used as collateral for borrowing. This unlocks leveraged staking strategies (e.g., 'stake, borrow, re-stake') and boosts overall capital productivity. This matters for protocols and users seeking maximum yield from a single capital position.
02
LSTs: Enhanced Composability
Cross-Protocol Integration: LSTs are ERC-20 tokens, making them natively compatible with the entire DeFi stack. They can be used as collateral in Aave, liquidity in Uniswap v3 pools, or collateralized debt positions in MakerDAO. This matters for architects building interconnected DeFi systems where asset fungibility is critical.
03
Native Stake: Direct Protocol Security
No Counterparty Risk: Native staking (e.g., staking ETH directly in an EigenLayer AVS or a Cosmos appchain) eliminates reliance on an LST provider's smart contract or governance risk. The stake is secured directly by the underlying protocol's slashing conditions. This matters for protocols where minimizing third-party dependencies and maximizing security guarantees is paramount.
04
Native Stake: Simpler Risk Model
Isolated Slashing Exposure: In a risk-isolated market, native stake is only exposed to the slashing conditions of that specific app or AVS. Using an LST introduces a dual-risk layer: the underlying LST's validator slashing risk plus the target app's slashing risk. This matters for risk officers and auditors needing to model and contain fault domains clearly.
HEAD-TO-HEAD COMPARISON
Feature Comparison: LST vs Native Stake in Risk-Isolated Money Markets
Direct comparison of liquidity, risk, and yield mechanics for DeFi collateral strategies.
| Metric | Liquid Staking Tokens (LSTs) | Native Stake |
|---|---|---|
Capital Efficiency |
| ~100% (locked in consensus) |
Yield Source | Staking rewards + DeFi lending/borrowing APY | Base protocol staking APY only |
Liquidity for DeFi | Immediate (e.g., use stETH on Aave, Compound) | Locked until unstaking period (e.g., 21-27 days on Ethereum) |
Smart Contract Risk Exposure | High (exposed to LST issuer & money market) | Low (limited to consensus layer) |
Slashing Risk Isolation | false (pool-wide slashing affects all LST holders) | true (individual validator penalty) |
Typical TVL in Isolated Pools | $15B+ (e.g., Aave v3 Ethereum market) | $0 (not natively supported as collateral) |
Protocol Examples | stETH (Lido), rETH (Rocket Pool), wstETH | Ethereum validator, Solana stake account, Cosmos delegation |
pros-cons-a
LSTs vs Native Stake
LSTs as Collateral: Pros and Cons
Key strengths and trade-offs for using Liquid Staking Tokens versus native staked assets as collateral in risk-isolated money markets like Aave V3, Compound, and Euler.
01
LSTs: Enhanced Capital Efficiency
Immediate Liquidity & Yield Stacking: LSTs like Lido's stETH, Rocket Pool's rETH, and Frax's sfrxETH can be simultaneously used as collateral for borrowing while earning staking rewards. This enables strategies like leveraged staking on platforms like Aave. This matters for protocols and users seeking to maximize APY from a single asset position.
02
LSTs: Superior Composability
Cross-Protocol Integration: LSTs are ERC-20s, making them compatible with the entire DeFi stack (DEXs, yield aggregators, other money markets). This reduces integration complexity for risk-isolated markets like Mars Protocol or Morpho Blue. This matters for developers building interconnected strategies and for users seeking flexible exit liquidity.
03
Native Stake: Eliminated Counterparty Risk
Direct Validator Exposure: Using natively staked assets (e.g., via EigenLayer, or native restaking pools) removes dependency on LST provider smart contract risk or governance failures. Collateral value is tied directly to the consensus layer. This matters for risk-averse institutions and protocols where minimizing external dependencies is critical.
04
Native Stake: Simplified Security Model
Reduced Oracle & Depeg Risk: Native stake isn't subject to the oracle price feed inaccuracies or de-pegging events that can affect LSTs (e.g., stETH's temporary depeg in June 2022). This provides a more stable collateral base for money market risk calculations. This matters for maintaining protocol solvency during extreme market volatility.
pros-cons-b
LSTs vs. Native Stake in Risk-Isolated Markets
Native Stake as Collateral: Pros and Cons
Key strengths and trade-offs for two primary collateral strategies in risk-isolated lending protocols like Aave V3, Compound III, and Euler.
01
LSTs: Superior Capital Efficiency
Higher Loan-to-Value (LTV) ratios: Protocols like Aave V3 offer up to 80% LTV for stETH, versus ~40% for native ETH. This allows users to borrow more capital against the same underlying value. This matters for leveraged staking strategies and maximizing yield farming returns within the DeFi ecosystem.
02
LSTs: Composability & Yield Stacking
Unlocks DeFi Legos: LSTs like Lido's stETH or Rocket Pool's rETH can be simultaneously used as collateral and earn staking rewards (~3-5% APR). This enables yield stacking (e.g., collateralizing stETH in Aave to borrow stablecoins for further yield). This matters for sophisticated treasury management and maximizing APY.
03
Native Stake: Eliminates LST-Specific Risk
No protocol or smart contract dependency: Bypasses risks associated with LST providers like Lido (governance centralization) or potential de-pegs. Collateral value is tied directly to the native asset. This matters for risk-averse institutions and protocols prioritizing maximum security over yield optimization.
04
Native Stake: Simpler Security Model
Reduces systemic risk vectors: In a risk-isolated market, native stake collateral simplifies oracle requirements and liquidation logic, as it's a primary asset. There's no need to model the health of a secondary LST protocol. This matters for protocol architects building minimal, auditable systems where failure domains must be strictly bounded.
CHOOSE YOUR PRIORITY
Decision Framework: When to Choose Which
LSTs for Protocol Architects
Verdict: Choose for composability and yield optimization. Strengths: LSTs (e.g., stETH, rETH) are highly composable ERC-20s, enabling seamless integration into existing DeFi money market standards like Aave and Compound. This allows for capital efficiency (staking yield + lending yield) and risk diversification across multiple validators. Architecting with LSTs reduces protocol-specific slashing risk and leverages battle-tested collateral types. Trade-offs: You inherit the smart contract risk and potential de-pegging of the LST issuer (e.g., Lido, Rocket Pool). Protocol design must account for LST oracle pricing and potential liquidity crunches during network stress.
Native Stake for Protocol Architects
Verdict: Choose for maximal security and validator alignment. Strengths: Direct integration with the consensus layer (e.g., using EigenLayer for Ethereum) provides the highest security guarantee and eliminates intermediary risk. It's ideal for protocols where slashing conditions are directly tied to the service's security (e.g., oracles, bridges). You gain direct control over validator set and governance. Trade-offs: Significant development overhead to manage validator operations, slashing logic, and withdrawal queues. Limits capital efficiency as staked assets are non-transferable and locked, reducing liquidity for users.
verdict
THE ANALYSIS
Final Verdict and Strategic Recommendation
Choosing between LSTs and native stake in risk-isolated money markets is a foundational decision that dictates your protocol's risk profile and composability.
LST-based strategies excel at maximizing capital efficiency and composability because they decouple staking yield from borrowing power. For example, a user can deposit Lido's stETH into Aave V3 on Ethereum, borrow stablecoins against it, and deploy that capital elsewhere, effectively leveraging their staked position. This model has driven significant TVL, with LSTs like wstETH and rETH becoming core DeFi collateral assets, enabling complex yield strategies across protocols like MakerDAO, Aave, and Curve.
Native stake strategies take a different approach by prioritizing security isolation and protocol-specific rewards. This results in a trade-off of reduced cross-protocol composability for a more predictable, self-contained risk model. Protocols like EigenLayer's restaking pools or Solana's marginfi with native SOL staking offer direct exposure to network security rewards and potential airdrops, but the collateral is typically siloed within that ecosystem, limiting its utility in the broader DeFi landscape.
The key trade-off: If your priority is maximizing capital efficiency and enabling complex, cross-protocol DeFi strategies for your users, choose an LST-integrated model. This path leverages established liquidity and composability standards. If you prioritize minimizing smart contract and liquidity dependency risks, or capturing exclusive native network incentives, choose a native stake model. This offers a cleaner risk profile and direct alignment with the underlying chain's security.
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall