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What derivatives create feedback loops with AVS slashes?
The most dangerous feedback loops are created by leveraged derivatives of LRTs. The simplest and most prevalent is the borrow-lend loop: using LSTs as collateral to borrow stablecoins to buy more LRTs. When an AVS slash causes LRT prices to fall, this loop unwinds violently, forcing the sale of the underlying LSTs. More complex derivatives like futures or options on LRTs would add further layers of leverage. A significant price move could trigger delta-hedging by market makers, which involves selling the spot LRT, accelerating the downward move. These derivative structures tightly couple the performance of AVSes with the core DeFi lending and derivatives markets, ensuring that a failure in one transmits instantly and amplified to the other.
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