Authorize Lido EarnETH Loss Coverage Below 1% Threshold For The Kelp Incident

TL;DR

Lido Earn contributors request DAO authorization to use the Lido Earn first-loss mechanism to cover Kelp-related losses incurred by Lido EarnETH users, even if such losses are below the previously approved 1% threshold. This is a one-off, Kelp-specific exception intended to support Lido Earn's continuity and user confidence.

Motivation

The April 2026 Kelp rsETH incident (LayerZero exploit) resulted in a material rsETH backing shortfall and triggered broader cross-protocol dislocation across DeFi. In response, a coordinated initiative — DeFi United — has been established to cover the rsETH deficit. However, even in the case of full coverage, Lido EarnETH vault users remain exposed to residual losses arising from elevated borrowing costs in leveraged positions, estimated at approximately 400–600 ETH, depending on the time required for the Kelp protocol to resume normal operations.

Lido DAO previously approved a first-loss mechanism for Lido Earn with a 1% loss threshold, which may limit its applicability to Kelp-related losses. However, given the irregular nature of the Kelp incident and Lido DAO’s commitment to supporting Lido Earn users, covering residual losses even if they fall below the 1% threshold would not only preserve user confidence but also reinforce Lido Earn’s competitive position and support its medium-term growth potential as market conditions normalize.

Proposal

It is proposed to authorize the use of the existing Lido Earn first-loss mechanism to cover losses related to the Kelp incident, irrespective of the 1% threshold.

This authorization is strictly limited to actual residual Kelp-related losses borne by the EarnETH vault users. It constitutes a one-off, exceptional use of the first-loss mechanism and does not modify the general ≥1% threshold rule. This authorization is intended to serve as a backstop to be used only to the extent that alternative loss coverage (e.g., from vault curators) is insufficient. The proposed coverage does not introduce any new treasury allocation, subsidize yield, offset foregone annual percentage yield (APY), smooth returns, or provide any profit support once normal vault operations resume.

This proposal is time-critical given the expected timeline of the broader rsETH recovery following the Kelp incident, which may conclude sooner than the standard governance cycle. For this reason, the Snapshot vote is proposed on an accelerated timeline. If approved, it will allow Lido Earn to act without delay after the broader incident is resolved.

If the DAO decision is delayed, Lido Earn may be unable to act even after the incident is resolved. This could unnecessarily extend loss coverage and withdrawal uncertainty for EarnETH users, and increase operational, legal, reputational, and commercial risks, while weakening confidence in Lido Earn.

Next Steps

If the proposal is approved:

• Lido Earn will be authorized to apply the first-loss mechanism to cover actual residual Kelp-related losses for EarnETH users, even if those losses are below 1%.
• Lido Earn contributors will publish a full post-mortem covering the incident, the vault’s exposure, and the response. Concrete changes to the risk framework, operating approach, and related controls will be proposed to reduce the likelihood of similar situations recurring.