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How does staking derivative volatility influence leverage limits?
The volatility of staking derivatives (LSTs, LRTs) is a primary input for setting leverage limits. Lending protocols use volatility to calculate the volatility ratio for their risk engines. A highly volatile asset requires a larger safety buffer (a lower LTV) to account for its price swings and prevent frequent liquidations. If an LRT's price becomes highly volatile due to speculation or uncertainty around its underlying AVSes, protocols will be forced to lower its LTV ratio. This mechanically reduces the maximum leverage available for that asset, directly linking the stability of the derivative's price to the amount of leverage the ecosystem can safely support.
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