LST-as-collateral

Definition ∞ LST-as-collateral describes the practice of utilizing liquid staking tokens (LSTs) as security for borrowing or other financial transactions within decentralized finance (DeFi) protocols. By pledging LSTs, users can obtain additional capital without unstaking their underlying assets, thereby continuing to earn staking rewards. This mechanism significantly enhances capital efficiency for participants. It allows for simultaneous earning and leverage opportunities.
Context ∞ The application of LST-as-collateral has become a significant driver of capital flow and innovation in DeFi, enabling more complex financial strategies. However, it also introduces additional layers of risk, including liquidation risks if the value of the LST declines sharply. A key discussion involves managing the interconnectedness and potential for cascading liquidations across protocols that accept LSTs as collateral. Future risk management frameworks will need to account for the unique characteristics of these derivative assets.