This is precisely where your perspective should be reconsidered. An LST only becomes liquid if a counterparty is available to provide liquid ATOM. Without this, the LST functions similarly to a staked token. “Liquid” staking occurs only when someone on the opposite side of the transaction provides the ATOM that the user purchases in exchange for the LST they wish to liquidate.
In most cases, a market maker serves as the counterparty, applying a spread and charging a fee for the trade. Typically, the market maker will redeem the LST they acquired for the ATOM they sold to the user and then wait for the 21-day unbonding period before replenishing the DEX pool. Throughout this process, they earn a profit.
Understanding this mechanism highlights that the liquidity of LSTs is directly tied to the market depth of available ATOM in the pool. While concentrated liquidity can reduce the spread, it doesn’t fundamentally increase the pool’s depth. This is why your argument is only partially correct and why we emphasized this point initially.
Using this example illustrates the counterintuitive relationship between LST adoption and market depth in LST/ATOM pools. As LST adoption grows, more liquidity must be provided by market makers, reducing the overall circulating supply of ATOM. However, this relationship isn’t linear—market makers won’t continuously increase liquidity beyond a certain threshold due to the capital inefficiency of liquid holdings, which don’t generate staking rewards.
To explore this further, a full review of professional-grade market-making strategies would be necessary, which might go beyond the general understanding of this forum. That said, we’d be happy to discuss this in more detail in a scheduled call, should you be interested.
In summary, LSTs are not the problem—they are part of the solution to the inflation issue. As LST adoption increases, market makers are incentivized to supply ATOM into liquidity pools, enabling seamless use and redemption of LSTs. Whether concentrated or not, the liquidity they provide depends on the market demand for LSTs, which in turn reduces the circulating supply as these liquid ATOM are used to deepen swap pools.
Lastly, it’s crucial to remember that liquid staking is, in essence, staking. The tokens are staked by the LST provider, which further reduces the supply of liquid ATOM, increases the bonding ratio, and consequently reduces inflation once the ratio crosses 67%. Additionally, we plan to propose an inflation formula reform that accounts for liquid staking ratios, allowing inflation rate adjustments to be amplified or reduced accordingly. This is a topic we’ll explore with all necessary details in a separate forum post. Regarding the inflation level itself, if the community wishes to lower inflation below 7%, this would require a parameter update of course but that wasn’t the point we tried to debate on this particular thread.
We hope this clarification helps you better understand the complex relationship between LST and broad market liquidity. Let us know if you need more details.
Govmos.
