A key process in freshwater plankton food webs is the regulation of the efficiency of energy and material transfer. Cyanobacterial carbon (C) in particular is transferred very inefficiently to herbivorous zooplankton, which leads to a decoupling of primary and secondary production and the accumulation of cyanobacterial biomass, which is associated with reduced recreational quality of water bodies and hazards to human health. A recent correlative field study suggested that the low transfer efficiency of cyanobacterial C is the result of the absence of long-chain polyunsaturated fatty acids (PUFA) in the diet of the zooplankton. By supplementation of single-lipid compounds in controlled growth experiments, we show here that the low C transfer efficiency of coccal and filamentous cyanobacteria to the keystone herbivore Daphnia is caused by the low sterol content in cyanobacteria, which constrains cholesterol synthesis and thereby growth and reproduction of the herbivore. Estimations of sterol requirement in Daphnia suggest that, when cyanobacteria comprise more than 80% of the grazed phytoplankton, growth of the herbivore may be limited by sterols and Daphnia may subsequently fail to control phytoplankton biomass. Dietary sterols therefore may play a key role in freshwater food webs and in the control of water quality in lakes dominated by cyanobacteria.