Using stake LP position as collateral involves transforming LP position into autocompounding vault shares which are then used in the market to enable borrowing. Below are the key components that facilitate this.
When a user interacts with the market, the staked position is unstaked and sent to the Drops Autocompounding vault. All generated yield is sold and converted to the base asset, thereby increasing the APY. The vault issues shares that increase in value over time and can be used to redeem staked LP tokens. These shares can also be used in the markets to enable lending and borrowing against them.
This contract is used to wrap and unwrap staked positions between vault shares and the underlying asset. For instance, in the case of borrowing, when a user borrows from the USDC market, the wrapper unwraps yvUSDC into USDC and sends it to the user.
This market accepts shares of the autocompounding vaults as collateral and works with the Wrapper to handle the depositing and withdrawing of assets behind the scenes.