Lido Lend Feature Highlight #1: Fallback Exits
Today we are excited to present the first of Lido Lend’s unique user features, dubbed Fallback Exits, a novel lending mechanism built to provide lenders with a secure and predictable liquidity exit path in times of turbulence.
Understanding Fallback Exits
In traditional lending markets, when loan asset liquidity dries up, lenders who want to withdraw are put in a position where they must wait for liquidity to return. This waiting can take days, or even weeks, before lenders regain access to a liquid position.
Fallback Exits are designed to address this need, by giving lenders an always available withdrawal path: when loan asset liquidity is insufficient, lenders can ‘Fallback Exit’ by using borrower collateral to supplement the withdrawal request.
Since Lido Lend consists of isolated markets and highly correlated assets (e.g. wETH <> wstETH, or USD <> Treasury RWAs), the option of exiting into borrower collateral (wholly or in part) provides a path to liquidity, even in extreme market turbulence.
Taking the ETH <> wstETH market as an example:
Assuming ETH liquidity is in short supply, in a traditional lending protocol, a lender would be stuck waiting for it to return; with Lido Lend, a lender can now utilize the Fallback Exit mechanism while attempting to withdraw which would allow for eligible borrower debt to be utilized to supplement any shortage in available ETH in order to meet the full withdrawal request. If Fallback Exit is utilized, the outstanding debt of relevant borrowers whose collateral is used for the Fallback Exit is also commensurately reduced. This represents a credible withdrawal path, even in adverse market conditions, into an asset that the lender is already (indirectly) exposed to via the lending market mechanism in a clear and understandable manner.
Which borrowers are impacted by Fallback Exits?
Subject to governance approval of proposed protocol specifications, borrower collateral in the case of a Fallback Exit would be taken from borrowers based on a highest-position-risk ordering: those with positions closest to the LLTV ratio would have their collateral utilized first, while borrowers with highly healthy positions are much less likely to be affected by Fallback Exits.
Full details will be available when the technical specification and market parameters are published in the next 2 weeks.
What’s Next?
Over the coming weeks, Lido Lend will progress through the required governance processes needed for general DAO acceptance of the protocol before mainnet launch. As a part of this, more features, technical specifications and audit reports will be made public.