Summary
Lido Earn contributors ask the DAO to authorize use of the first-loss coverage below the 1% threshold. Conditional on the success of the DeFi United relief initiative, the residual borrow-rate losses on leveraged staking/restaking positions in Lido Earn are expected to be approximately 400 to 600 ETH. This is below the 1% threshold, but still material.
The intention of Lido Earn contributors is to work with curators to cover as much of this loss as possible without involving DAO funds, but a 100% curator-funded outcome does not currently appear likely.
Given that it was proposed to contribute 2,500 stETH to the Kelp relief fund, conditional on full rsETH deficit coverage, not providing full coverage to EarnETH users would be difficult to justify and could materially reduce the project’s medium-term growth potential. In addition, if losses lead to litigation, the associated costs alone could reach hundreds of thousands of dollars regardless of the outcome. For these reasons, Lido Earn contributors believe it is in the DAO’s best interest to authorize this one-time use of the first-loss fund.
This would be an irregular, one-off application of the first-loss fund, driven by user protection, branding, and business considerations, rather than a change to the general 1% rule.
Motivation
There are clear business, user-protection, and legal-risk reasons to act. If Lido intends to continue operating Lido Earn and similar products, it is important to protect users in situations like this and preserve confidence in the product. It would also be difficult to justify supporting the broader rsETH recovery effort while allowing EarnETH users to crystallize related losses from the same situation. Beyond the direct user impact, any dispute or litigation arising from such losses could itself impose material costs on the project regardless of outcome.
Conditional on the success of the DeFi United relief initiative, the rsETH deficit itself is expected to be covered through the dedicated relief effort. In that case, the remaining risk to Lido Earn should primarily come from borrow-rate losses on leveraged staking/restaking positions while exposure is being unwound. Based on current estimates, those residual losses may end up in the range of approximately 400 to 600 ETH, depending on how long it takes to resume the Kelp protocol. Earn contributors will work with curators to cover as much of the loss as possible but a fully curator-funded outcome does not currently appear likely and may in any case take time to settle.
The 1% threshold was designed as a default rule for material losses, not as a reason to deny coverage in a one-off case where coverage is otherwise justified. This proposal does not change that general rule. It asks the DAO to authorize a Kelp-specific exception in light of the particular user, business, and operational considerations described above.
This proposal is also time-critical. The rsETH situation is expected to resolve within roughly 5–10 days, while the standard snapshot voting window is 7 days. Postponing the vote could leave the vault stuck in an avoidable holding pattern even after the underlying situation is resolved, delaying withdrawals and prolonging uncertainty for users. That would create unnecessary legal, reputational, and commercial risk, weaken confidence in Lido Earn, and make the product harder to defend if Lido is seen as supporting the broader rsETH recovery while leaving its own users exposed.
Rather than changing the general framework, this proposal creates a one-off, Kelp-specific exception. It is intended to cover actual losses if needed, not to subsidize APY, smooth returns, or provide profit support once normal operations resume.
Proposal
Lido DAO authorizes the use of the existing Lido Earn first-loss fund to cover losses related to the Kelp situation irrespective of the 1% threshold, if and to the extent such coverage is needed.
For the avoidance of doubt, this authorization is intended to compensate actual Kelp-related losses borne by the vault, if any, after the rsETH situation is resolved. It is not intended to subsidize yield, offset foregone APY, or provide any profit support once normal vault operations resume. To the extent curator participation is confirmed and subsequently settled, any such curator loss coverage would reduce the net amount required from the first-loss fund.
Scope
This proposal:
- applies only to the Kelp situation, doesn’t set a precedent of DAO covering 100% losses in any situation;
- does not change the 1% threshold as the general rule;
- uses the existing first-loss fund;
- does not create any new treasury allocation;
- is intended to cover actual Kelp-related losses, if needed, but not APY support or post-recovery returns;
- contemplates working with curators in respect of loss coverage, even if final settlement occurs later.
Vote
Should Lido DAO authorize the use of the existing Lido Earn first-loss fund to cover Kelp-related losses irrespective of the 1% threshold, if and to the extent such coverage is needed, solely for actual losses and not for APY support or post-recovery profit enhancement?
Next Steps
Once the Kelp situation is resolved, Lido Earn contributors intend to publish a full post-mortem covering the incident, the vault’s exposure, and the response. That review should lead to concrete changes to the risk framework, operating approach, and related controls to reduce the likelihood of similar situations recurring.
The post-mortem will also be used as an opportunity to strengthen the product. A credible resolution, followed by transparent lessons learned and framework improvements, can help restore confidence and put Lido Earn in a stronger position to capture market share after normal operations resume.
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