Yield assets like stETH and rsETH—liquid staking or restaking tokens—are sometimes used as collateral for options. Their biggest risk is not normal price swings, but chain liquidations triggered by depegging. If the underlying asset breaks its peg, risk travels quickly through collateral, lending, and liquidation paths, causing a pile-up of forced selling.
Transmission Path: From Depeg to Spiral Liquidation
The process usually unfolds in three steps. You may be caught in any one of them.
Step 1: The Underlying Depegs and Collateral Value Evaporates
Yield asset prices depend on their underlying asset. For example, stETH should track ETH. If market panic happens—such as many validators queuing to exit and draining liquidity—or oracle quotes go wrong or an LRT protocol has a problem, stETH starts to diverge from ETH. That is where the risk begins.
This is the start of the whole chain. Aave's loan-to-value ratio for wstETH is as high as 95%, meaning even a temporary stETH depeg can push many positions straight into liquidation. Academic research also notes that on some layer-2 networks, bridged ezETH only needs to fall 3.33% to liquidate maximum-leverage positions.
Step 2: Liquidation Gets Triggered and the First Domino Falls
When collateral value falls, a lending protocol's health factor drops below the threshold and the system starts forced liquidations. The problem is that liquidity at liquidation time is often too thin.
For example, research points out that if about 64,890 ezETH of collateral on Linea were liquidated, the local DEX could absorb only 0.23% of it. Most sell pressure would have to flow back to Ethereum mainnet. This "want to sell but cannot sell" situation pushes prices down further.
Step 3: A Death Spiral Forms and Risk Spreads Across Protocols
Lower prices trigger more liquidations, which push prices down again, causing more liquidations—a liquidation spiral. In 2022, stETH depegged by just 5 cents and caused more than $180 million in DeFi liquidations.
More importantly, risk spreads. When Kelp DAO was hacked, Aave had taken rsETH as collateral and faced about $200 million in potential bad debt. This is the real consequence of using yield assets as collateral—one protocol's failure can directly drag down another protocol.
Practical Checklist: What Risks Are You Taking?
Before using these products, check your exposure against the following risk points:
- Depeg risk: Has the LST/LRT you are using ever suffered a serious depeg in the past?
- Liquidity risk: Is the asset deep enough on DEXs to absorb a large-scale liquidation?
- Liquidation threshold: Is the protocol's LTV unusually high, such as 95%? Is your safety buffer too small?
- Number of nested layers: How many protocol layers are wrapped around your yield asset? More layers mean a longer risk transmission chain.
How to Check After You Take a Position
In the margin details of your options or lending platform, find the yield asset you posted as collateral, such as stETH or ezETH. The system will show its current discount rate or collateral ratio. If that ratio is below 90%, the platform is already applying a discount, so your real safety margin is narrower than what the book value suggests.
