How ‘LSTfi’ economy is letting investors earn multiple yields on a single ETH


How ‘LSTfi’ economy is letting investors earn multiple yields on a single ETH


Billions of dollars are flooding into Liquid Staking Finance, or LSTfi – A corner of the crypto world that has quickly become the biggest beast in decentralized finance. A wave of capital is chasing protocols built on Liquid Staking Tokens (LSTs), which have completely rewired how people earn money on their crypto and cracked open new ways to make their assets work harder.

The total money locked up in these protocols has exploded, rocketing past $67 billion by mid-2025. That figure represents a massive jump from just a few years ago. This proves this isn’t a fleeting trend, but a fundamental shift in the DeFi arena, making it the largest category by sheer value.

Source: DeFiLlama

The whole financial machine runs on a deceptively simple idea. On networks like Ethereum that use Proof-of-Stake, you can “stake” your crypto to help keep the network secure and get paid for it. The big problem was always that your staked coins were stuck, completely illiquid. Liquid staking protocols changed the game by issuing LSTs—think of them as digital claim checks for your staked funds.

You can trade these tokens, use them as loan collateral, or throw them into other money-making schemes. All while your original stake is still earning rewards in the background. This ability to get paid twice from one asset is the engine driving the entire LSTfi economy.

Art of ‘yield stacking’ – Advanced strategies take center stage!

In the endless hunt for better returns, sharp investors are now “yield stacking.” This is really just a fancy term for layering different income streams on top of a single asset.

1. Playing the market maker on Decentralized Exchanges (DEXs) – A go-to move is to supply LST pairs, like stETH and ETH, to liquidity pools on exchanges such as Curve or Balancer. When you do this, you become a liquidity provider (LP) and your earnings come from multiple sources. You still get the base reward from your LST.

You also get a cut of the trading fees every time someone swaps tokens in your pool. On top of that, many exchanges will throw in their own tokens as an extra bribe to keep you around.

2. Getting leverage with LSTs – Another popular, and much riskier, play involves using your LSTs as collateral on lending platforms like Aave. This opens the door to “recursive staking,” a loop where you deposit your LST, borrow ETH against it, use that ETH to get more LSTs, and repeat the whole process.

It’s a way to magnify your staking profits, but it also magnifies your risk. If the LST’s price slips against ETH, you could get liquidated in a hurry.

Restaking – Crypto’s newest gamble on yield, security

A new concept called “restaking,” championed by projects like EigenLayer, is already shaking things up. Restaking lets you take your already-staked ETH and pledge it again to help secure other, newer networks known as Actively Validated Services (AVSs). It’s a promise of even higher returns, but it’s also meant to solve a huge security headache for up-and-coming blockchains.

EigenLayer essentially created a security rental market. It connects people willing to “restake” their ETH with projects—like data networks, oracles, and bridges—that desperately need security. In exchange for accepting more “slashing” risk (the punishment for bad behavior), these restakers earn extra yield from all the AVSs they help secure.

The money has followed. EigenLayer’s locked-in value has blasted past $20 billion, making it the second-largest protocol on DeFi. This has spawned its own sub-industry of Liquid Restaking Tokens (LRTs) from platforms like Ether.fi and Puffer Finance. They handle the messy parts of restaking for you and spit out a simple token that represents your growing, multi-layered investment.

Source: Dune Analytics

A deep dive into the risks!

For all its cleverness, this LSTfi boom is a house of cards built on some wobbly pillars that could lead to a system-wide meltdown.

  • Code flaws and bad data – The whole system is just code. One bug in an LST, restaking, or DeFi protocol could wipe out fortunes instantly. The oracles that feed price data to these systems are another weak point; if they get manipulated, they can be used to force unfair liquidations and drain funds.
  • The De-peg death spiral – Everyone assumes an LST like stETH will trade at or very near the price of ETH. But a panic in the market could break that “peg.” A de-peg could set off a chain reaction of liquidations on leveraged positions, forcing more sales, pushing the LST price down further, and creating a vicious downward cycle.
  • Irony of centralization – The wild success of LSTs has ironically pushed power into fewer hands. Lido, the biggest player, at one point controlled almost a third of all staked ETH, sparking fears about one entity having too much sway. This clumping of power in big pools and regulated companies like Coinbase creates weak spots for censorship. We saw this vulnerability after the U.S. Treasury sanctioned Tornado Cash, and a huge percentage of Ethereum blocks suddenly became compliant with the sanctions.

Ethereum’s Vitalik Buterin has sounded the alarm too, warning that restaking could introduce “significant systemic risk” by piling too much responsibility onto Ethereum’s core security. A spectacular failure of a big restaking protocol could create intense social pressure to rewind the blockchain and bail out the victims. This would shatter Ethereum’s reputation for being neutral.

Where do global regulators stand?

As the LSTfi industry gets bigger, governments worldwide are scrambling to figure out what to do with this new beast. As expected, this has created a messy and inconsistent set of rules.

  • United States – A key moment came on 5 August 2025 when an SEC division suggested that some liquid staking setups aren’t securities. The industry cheered, but the guidance was narrow and not legally binding. Meanwhile, the CFTC has gone after DeFi protocols for offering what it calls illegal derivatives, with its enforcement chief flatly stating that illegal deals don’t become legal just because a smart contract is involved.
  • European Union – The EU is playing it slow. Its huge MiCA regulation for crypto is on the books but doesn’t really tackle the wild west of DeFi just yet.
  • United Kingdom – The UK is trying to fit crypto into its existing financial rules, which would mean any firm offering staking services would need a license from the Financial Conduct Authority (FCA).
  • Asia – Hong Kong is building a licensing system for crypto platforms that will cover staking. Singapore, on the other hand, is taking a more hands-on approach with “Project Guardian,” a sandbox where giants like JPMorgan and DBS Bank can experiment with tokenizing assets in a controlled setting.

‘Internet Bond’ and the future

Strip away the daily noise of greed and fear, and you’ll see something more fundamental taking shape. People are finding uses for LSTs that go far beyond just stacking yields, setting the stage for these tokens to become a core part of the digital economy.

The idea of an LST as the “internet bond” is catching on fast. The comparison works because staking produces a steady, if not fixed, return, much like the coupon payment on a traditional government bond. Protocols like Ethena are running with this idea, trying to package staked ETH into a simple, yield-bearing savings product for anyone on the internet.

This new financial Lego brick is already being used to build other novel products, like stablecoins that earn their own interest, fixed-rate savings accounts on platforms like Pendle, and even loans that pay themselves off using the yield from the collateral.

As this chaotic and transformative corner of finance grows, its future will be defined by the tug-of-war between financial alchemy, terrifying new risks, watchful regulators, and the ambitious dream of a truly open financial world.

Next: Why JPMorgan thinks DeFi could be a $5 trillion market by 2030



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