Lido DAO has passed a significant governance proposal, allocating $5 million from its treasury to establish a first-loss protection mechanism for its Earn product suite. The funds are designated to act as a capital buffer, absorbing initial losses in the event of a confirmed incident within the curated DeFi strategies. The allocation is split, with $3 million in wstETH deployed to the EarnETH vault and $2 million in USDC to the EarnUSD vault.
The mechanism is designed to protect other depositors by reducing the DAO's vault shares first to offset losses, thereby decreasing the total supply and cushioning the impact on users. The DAO emphasized that it operates under the same conditions as any other participant, paying the same fees and facing the same risks, with no preferential treatment or early exit rights. The conditions triggering this protection and the execution process are codified in the governance proposal, with ongoing reports to be published on its status.
In a separate but related development, the Lido Growth Committee has proposed a major token buyback initiative. The proposal seeks to use up to 10,000 stETH from the DAO treasury to purchase LDO tokens on the open market, managed by the Lido Ecosystem Foundation. The purchased tokens would be returned to the treasury.
The primary rationale is the significant depreciation of LDO's price relative to ETH. The current LDO/ETH ratio is approximately 0.00016, representing a 63% decline from the two-year average and a 70% drop from previous levels around 0.0005. The committee argues this is a fundamental mispricing, as protocol fundamentals have remained strong. While net protocol rewards fell about 20%, costs improved by 13% year-on-year and the protocol's revenue share increased from 5% to 6.11%. Lido maintains its position as the leading liquid staking protocol by Total Value Locked (TVL).
Lido explicitly states that the first-loss protection is not insurance, a guarantee, or a risk-free promise, and that DeFi strategies still carry inherent smart contract, market volatility, and dependency risks.
