Using Liquid Staking Tokens in DeFi: Collateral, Pools and Loops

Collateral in lending markets

The most common use is supplying an LST to a money market and borrowing against it. The staked position keeps earning while the borrowed asset funds something else — expenses, another position, or simply liquidity without selling.

Lending markets price LST collateral using an oracle. If that oracle reads a stressed secondary-market price rather than the protocol redemption rate, a temporary discount can trigger liquidations even though nothing is actually wrong with the underlying stake. Understanding which price feed a market uses is more important than the headline loan-to-value ratio.

Liquidity pools and the discount trade

Providing liquidity to a pool that pairs an LST with its underlying asset earns swap fees and often extra incentives. Because the two assets track each other closely, divergence loss is smaller than in an unrelated pair — but it is not zero, and it grows precisely during the depeg events when you would most want to exit.

Pool incentives are also temporary by design. A strategy that is only profitable while an emissions programme runs is not a yield; it is a subsidy with an end date.

Looping and leveraged staking

Looping means supplying an LST, borrowing the underlying asset, staking that, and repeating. Each turn multiplies exposure to the staking reward rate while also multiplying exposure to the borrow rate and to liquidation.

The math is unforgiving. The spread between the staking reward and the borrow cost is often only a couple of percentage points, and borrow rates float. A rate spike can flip the whole structure negative while you sleep, and an oracle-driven discount can liquidate it outright. Loops demand active monitoring and conservative health factors, and they are not a passive product regardless of how they are packaged.

A sane checklist before deploying

Use the wrapped, non-rebasing form wherever a contract is involved. Confirm the oracle methodology. Assume incentives disappear and check whether the base strategy still makes sense. Model what happens if the LST trades several percent below redemption value for a month. And keep the total exposure small enough that a bad week is an annoyance rather than an event.

Why wstETH dominates Lido Finance DeFi strategies

Most of the strategies described here are built on wstETH rather than stETH, because Lido Finance's rebasing token changes balances in a way lending markets and AMMs handle poorly. Wrapping first is standard practice, and forgetting to do so is a common reason a deposit silently stops accruing rewards inside a protocol.

Before looping anything, price the downside honestly: liquid staking risks explained and rebasing vs wrapped tokens.