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Where Liquid Staking Tokens (LST) Are Used

· 6 min read

In this lesson, we’ll explore where and how Liquid Staking Tokens (LSTs) are used.
There are five main areas of application — four are active strategies, and the fifth is passive (simply holding the token).

The Five Use Cases for LSTs​

  1. Holding (Passive Strategy)
  2. Looping Strategies (Lending Markets)
  3. Using LSTs as Collateral (Borrowing Model)
  4. Liquidity Pools (DEX Participation)
  5. Re-Staking (Security Extension and Yield Layer)

Let’s examine each of these in detail.

1. Holding (Passive Yield)​

The simplest and safest way to use an LST is to hold it in your wallet.

For example:

  • You stake ETH via Lido Finance → receive stETH.
  • You keep stETH in your wallet.
  • You automatically earn from:
    • The base staking yield (currently around 3% annually).
    • The long-term price growth of the underlying asset.

This approach doesn’t require any action. It applies not only to Ethereum but also to Solana (mSOL, JitoSOL), TON (stTON), Avalanche (sAVAX), and other blockchains that support staking and liquid staking providers.

It’s the most conservative and lowest-risk strategy — you simply hold the LST and earn the embedded staking yield.

2. Looping Strategies (Lending Markets)​

This is an advanced yield-optimization strategy used by experienced DeFi participants.

The idea:
You deposit your LST (e.g., stETH) as collateral and borrow the base asset (e.g., ETH) against it.
Then you stake the borrowed ETH again, receive more stETH, and repeat the process.

Example:

  • You deposit stETH earning 3% yield.
  • You borrow ETH at a 2% rate.
  • The difference (delta) = 1% profit.
  • You restake the borrowed ETH → get more stETH → redeposit → repeat.

Each cycle compounds the yield, allowing you to raise your effective annual return to 7–10%, depending on the number of loops.

Main Risk: Liquidation due to depeg.
If stETH temporarily loses parity with ETH, your collateral value drops, and your loan may be liquidated.

This strategy works not only for Ethereum but also for Solana, Avalanche, or any other blockchain with an active lending market and positive delta (staking yield higher than borrowing rate).

Example on Solana:

  • Stake SOL → earn 8%.
  • Borrow at 6% → delta = 2%.
  • Through looping, effective yield may reach 15% annually.

3. Using LSTs as Collateral in Lending Markets​

In this case, you deposit your LST as collateral to borrow other assets — such as stablecoins (USDT, DAI) or volatile assets (BTC, ETH).

You continue to:

  • Earn staking rewards on your LST,
  • While simultaneously using the borrowed funds for new investments or strategies.

This allows capital efficiency — your assets continue generating yield even while being locked as collateral.

For example:

Deposit stETH as collateral → Borrow DAI stablecoins → Use DAI in farming or other DeFi opportunities → Earn yield on both sides.

Liquidation risk: If the price of your collateral drops below the liquidation threshold, your position may be partially or fully liquidated.

4. Liquidity Pools (DEX Yield + Staking Yield)​

Another powerful LST use case is providing liquidity on decentralized exchanges (DEXs).

You can add your LSTs to pairs such as:

  • stETH/ETH
  • sAVAX/AVAX
  • JitoSOL/SOL

By doing so, you earn:

  1. Staking yield from the LST itself.
  2. Trading fees from each swap in the pool.
  3. Additional incentives (bonus tokens from Lido, Jito, or other protocols).

For example, Lido Finance rewards stETH/ETH liquidity providers with LDO or ETH tokens to strengthen pool liquidity and ensure price stability.

Similarly, Jito Network on Solana rewards JitoSOL/SOL liquidity providers with JITO tokens.

Risk: Impermanent loss — if the price of your LST fluctuates against the base asset, your pool position value may decrease compared to holding both assets separately.

Still, liquidity pools remain one of the best ways to combine staking income, trading fees, and incentive rewards.

5. Re-Staking (Extending Ethereum’s Security Layer)​

Re-staking is one of the newest and most transformative use cases for LSTs.

What It Means​

Re-staking allows assets staked on Ethereum to be used again to secure other protocols — such as bridges, oracles, or Layer 2 networks.

Users can delegate their ETH or LSTs (e.g., stETH) to re-staking protocols, like EigenLayer, which extend Ethereum’s validator security to other projects.

Why It Matters​

Ethereum currently offers the strongest Proof-of-Stake (PoS) security in the world.
Other protocols can “borrow” Ethereum’s security infrastructure instead of building their own validator network.

In exchange, they pay rewards to re-stakers.

This means that stakers earn:

  • Base Ethereum staking rewards, plus
  • Extra income from protocols that rent Ethereum’s validator security.

Analogy​

Imagine Ethereum as a president with an elite security team (validators).
Other leaders (projects) can hire the same team for protection — paying for this service.
Ethereum validators thus secure multiple entities simultaneously, generating more yield for stakers.

Re-staking turns staked assets (including LSTs) into multi-purpose yield instruments, combining security provision with additional income streams.

Instant Unstaking Through DEXs​

Another practical use case for LSTs is instant unstaking.

Instead of waiting for the unbonding period (which may range from hours to weeks), you can immediately swap your LST for the base token on a DEX.

Example:

  • stETH → ETH via Curve Finance.
  • sAVAX → AVAX via Trader Joe or VirtUs Swapper.
  • JitoSOL → SOL via Meteora or Jupiter Aggregator.

While the exchange rate is slightly less favorable (0.3–1% below the unstaking rate), you gain immediate liquidity and flexibility.

Maintaining deep liquidity in these pairs (e.g., stETH/ETH) is crucial — this is why Lido and other providers incentivize liquidity with extra token rewards.

Example:

  • Official unstaking on Avalanche = wait 15 days, full rate.
  • Swap on DEX = instant, but lose ~1–2% yield difference.

Combining Income Streams​

By participating in liquidity pools, you can simultaneously earn:

  1. Base staking yield (built into the LST).
  2. DEX trading fees (shared among liquidity providers).
  3. Bonus rewards (from protocols incentivizing liquidity).

This creates multi-layered yield, combining staking, trading, and DeFi incentives.

Ethereum’s Dominance in the LST Ecosystem​

Currently, Ethereum controls about 97% of the entire liquid staking and re-staking market.
The remaining 3% is distributed among Solana, Avalanche, TON, and a few smaller ecosystems.

Ethereum’s strong dominance comes from its:

  • Robust validator network,
  • Deep liquidity and DeFi integrations, and
  • Proven reliability as the foundation of decentralized finance.

Even newer blockchains (like Solana) are adopting Ethereum-compatible architectures to leverage its ecosystem standards and liquidity depth.

Summary​

Main use cases for Liquid Staking Tokens (LSTs):

  1. Passive holding — earn built-in staking yield.
  2. Looping strategies — leverage the delta between staking and borrowing rates.
  3. Collateral lending — borrow assets while maintaining staking rewards.
  4. Liquidity provision — earn trading fees and incentives on DEXs.
  5. Re-staking — extend Ethereum’s security to other protocols for extra yield.
  6. (Bonus) Instant unstaking — swap LSTs for base tokens instantly via DEXs.

These use cases make LSTs a cornerstone of modern DeFi — combining liquidity, yield, and flexibility while leveraging blockchain security layers.

In the next lesson, we’ll discuss the risks of liquid staking — what can happen to your assets if you simply hold them, and what additional risks arise when using LSTs in DeFi strategies.

These materials are created for educational purposes only and do not constitute financial advice.