Lido DAO has introduced a proposal to temporarily adjust the loss protection mechanism for EarnETH as the Kelp incident continues to unfold. Under the current framework, first-loss protection is activated only when losses exceed 1% of the vault’s holdings. The new proposal would effectively relax that threshold in this specific case so users could still receive full compensation even if losses remain below 1%.
A one-time response tied to the rsETH shortfall
According to the proposal, the adjustment is designed to address the impact of the ongoing rsETH shortage. If the shortfall is resolved through DeFi United, the estimated residual loss from borrowing rates would be around 400 to 600 ETH. Lido DAO says the temporary measure would allow those losses to be covered, preventing users from missing compensation solely because the standard trigger threshold was not reached.
The proposal makes clear that this is not intended to rewrite the normal protection framework. The standard 1% first-loss rule would remain in place. Instead, the DAO is framing the change as a one-off exception aimed at protecting users during an unusual event while also preserving Lido’s brand reputation.
Timing adds pressure to governance
The proposal is also time-sensitive. Lido indicated that the rsETH incident could be resolved within 5 to 10 days, while the DAO’s standard voting period lasts 7 days. That creates a narrow window for governance to act before the situation is fully settled, making timing an important factor in whether the compensation mechanism can be adjusted in practice.
Market moves around the news appeared limited, with ETH, LDO, and RSETH showing only modest daily changes at the time of publication. Even so, the proposal highlights a broader DeFi governance challenge: how protocols should respond quickly to exceptional incidents without permanently weakening established risk rules. If approved, the measure would expand compensation coverage for EarnETH users while demonstrating Lido’s willingness to use targeted governance action in a crisis.