LSTs
Short Tail LSTs
While stETH and rETH have enough liquidity to be integrated to existing lending markets, their capital efficiency is limited by the volatility of the LST price action due to external factors which are unrelated to the fundamentals of the validator set underlying the provider itself. Since Ion Protocol focuses on the validator reserves and their effectiveness in the consensus layer, a loan position's health in Ion's system is agnostic of temporary swings in price action and is not subject to noise other than that of the validator fundamentals. This goes for both the borow side of the market as well as the lender side of the market.
Short Tail LSTs In Ion
Currently, short-tail LSTs can be used to lend in Ion's LRT/LST market. By lending in this market, lenders gain exposure to restaking without having to undertake the additional risks associated with depositing into EigenLayer and LRTs. Lenders will retain access to their staking yield while gaining access to additional yield from borrowers and additional potential liquid restaking provider incentives.
Ion can create additional markets for short-tail LSTs as well. An example of such a market would be one where lenders deposit ETH and borrowers collateralize their short-tail LSTs to borrow ETH.
Long-Tail LSTs
Long-tail LSTs are staked ETH tokens with low market capitalization and liquidity.
Existing lending markets are not able to integrate these long-tail LSTs since their liquidations are entirely reliant on price oracles. With smaller liquidity comes weaker price discoverability which means price oracles can report a volatile range of prices susceptible to market manipulations. This means liquidations can occur unexpectedly, making it difficult for the lending market to protect itself from bad debt.
However, since Ion relies on consensus layer reserves and validator activities, we can integrate LSTs regardless of their market cap, as long as their validator fundamentals are sound.
This means Ion Protocol prioritizes liquid staking providers with differentiated technologies—ranging from distributed validator technology (DVT) to trusted execution environment (TEEs) guarantees of hardware setups—when integrating LSTs to offer stakers the unique advantage of being able to utilize long tail LSTs in DeFi.
The types of providers that Ion Protocol is able to support is also constrained by the transparency of the provider's validator set.
Long-Tail LSTs In Ion
It's important to note that because of Ion's composable markets, these markets could be deployed without putting the rest of the protocol at any additional risk.
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