Lido DAO is proposing a one-time threshold adjustment to address residual losses within its EarnETH vault. The goal is to rebuild user confidence while avoiding the expectation of long-term financial support.

Addressing Residual Losses in EarnETH

As DeFi United works to restore rsETH backing, Lido DAO has identified a need to protect users of the Lido Earn ETH vault from remaining losses. Currently, the vault has approximately 9% exposure, equivalent to around $21.6 million, with estimated residual losses between 400 and 600 ETH.

The Protection Gap

These losses, while significant, fall below the 1% threshold linked to the $3 million first-loss buffer. This creates a gap in coverage, as external efforts have addressed the primary losses, but smaller, remaining impacts haven’t been resolved. Lido’s proposed solution involves a one-time adjustment to the threshold to ensure these smaller amounts are covered.

Testing Treasury Resilience

This intervention is designed to stabilize confidence in the system and prevent ongoing losses from impacting the protocol. It also serves as a test of Lido’s treasury resilience and its ability to absorb external shocks.

Previous Stabilization Efforts

Following the rsETH incident, the DAO allocated up to 2,500 stETH (approximately $5 million) to stabilize affected positions and prevent forced liquidations. This was necessary due to external risks impacting integrated products, requiring internal support.

Balancing User Protection and Risk Management

Although Lido’s treasury currently holds nearly $94 million, this allocation represents a new dynamic where protocol funds are used to mitigate external pressures. While governance approval demonstrates strong coordination, it also subtly alters user expectations.

Evolving Approach to Risk

Lido’s approach to liability and integration risk has evolved in response to the Kelp exploit, which highlighted the potential for external integrations to transmit risk. The DAO proposes using its existing first-loss fund exclusively for Kelp-related losses, without changing the 1% rule or adding new capital.

Setting Boundaries for Future Coverage

This strategy acknowledges that while the core protocol remains unaffected, user exposure still requires a response. Lido is striving to balance user protection with restraint, aiming to restore confidence without establishing a precedent for widespread bailouts. This suggests that future risks may not receive the same level of support.

Ultimately, Lido DAO is addressing residual losses with a limited use of treasury funds, carefully balancing user protection with risk management. This move aims to reinforce trust in the short term, but repeated interventions could strain reserves and reshape user expectations regarding protocol-level risk coverage.