For the most part, the relationships and dependencies in cryptocurrencies are make believe trades using worthless tokens. But they offer a good blueprint for how dubious assets can carve a path into the financial system and cause a crisis.

The latest example of this comes from the decentralized finance (DeFi) ecosystem. Liquid staking platforms and their tokens have multiplied after Ethereum enabled staking withdrawals. This has happened despite staking being a loss-making proposition for most investors.

LSTs As Collateral

Research firm Messari writes that liquid staking tokens or LSTs are gradually replacing Ether as prime collateral in smart contracts across the DeFi ecosystem. Both Ether and LSTs are useless as far as their applications inside or outside the cryptocurrency ecosystem is concerned.

Even then, LSTs occupy a perch below that of ether which is, at least, used as gas fee to commit transactions on Ethereum’s blockchain. The sole function of LSTs is to act as a substitute for ether. They are not doing a good job of that either.

Lido, the biggest staking platform for ether, is facing liquidity problems for its native token stETH because it doesn’t have enough rewards to compensate token holders in the smart contract liquidity pool.

FRAX finance’s ether substitute is a derivative of its ether derivative. [Yes, crypto learns quickly from traditional finance]. It is heavily dependent on the state of affairs at Curve Finance, where it is the biggest holder of the protocol’s native token CRV. The token’s price slid last week after its founder was found to have deposited millions of dollars worth of CRV tokens as collateral for a stablecoin loan.

The swarm of LST tokens over the DeFi ecosystem is similar to Tether’s blanketing of the crypto ecosystem at centralized exchanges. No prizes for guessing the consequences of these maneuvers.