DeFi lending protocols are taking a hard look at which tokens they accept as collateral, and liquid restaking tokens — or LRTs — are getting a particularly cautious reception. The reason: these tokens introduce extra risk layers tied to AVS-specific slashing and redemption complexity, according to a review of current risk-management practices in the sector.
Why wrapped stETH wins out
Most lending platforms now prefer non-rebasing, yield-bearing token wrappers such as wstETH over their rebasing counterparts. The reason is straightforward: rebasing tokens complicate accounting and liquidation calculations. Wrappers sidestep those issues entirely, making it easier for protocols to run liquidations without surprises. That simplicity carries real weight when markets get choppy.
The extra risk of LRTs
LRTs go a step further. They let users earn yield from multiple actively validated services, but that yield comes with slashing conditions. If an operator gets slashed, the token takes a hit. Redemption mechanisms for LRTs also tend to be more complex — involving queues or secondary swaps — and that directly impacts how well the token holds its peg during stress. When liquidations pile up in thin markets, depegs can feed on themselves, deepening discounts and triggering more liquidations.
Diversified validator operators with insurance buffers reduce slashing correlation, which makes the collateral more reliable. Centralized custody models increase that correlation risk, something lenders are increasingly wary of.
Oracles and liquidity depth
Oracles have to pull price data from multiple venues and include circuit breakers to avoid underestimating discounts during depegs. A single-venue feed can miss the real price of a token that's trading at a steep discount elsewhere. If the oracle reports a higher price than what the market will actually pay, a lending protocol may not liquidate fast enough, and bad debt piles up.
Liquidity depth across several trading venues helps narrow price gaps and prevent failed liquidations. Without that depth, even a well-designed oracle can't protect against sudden price dislocations.
Risk parameters matter most
No matter how a token is designed — whether it's rebasing, wrapped, or an LRT — the safety of a lending pool ultimately comes down to risk parameters: loan-to-value ratios, liquidation thresholds, and supply or borrow caps. Those settings have a bigger effect on collateral safety than the token's structure alone.
The industry is still working through how to model the new risks LRTs bring. Protocols that accept them are tightening those parameters, but questions remain about how to handle self-reinforcing depegs when multiple liquidations hit at once. That unresolved problem will shape how lending markets evolve in the next downturn.
