Lido Lend Exit Plan Would Tap Borrower Collateral for Withdrawals

Lido contributors have outlined a withdrawal mechanism for the proposed Lido Lend protocol that would use borrower collateral to pay exiting lenders when available loan assets run short, reducing affected borrowers’ debt at the same time.

The design, called Fallback Exits, would tap positions closest to the liquidation loan-to-value ratio first. That ratio, known as LLTV, sets the debt-to-collateral limit used to determine liquidation eligibility.

The trade-off is an additional exit route for lenders that can shrink borrowers’ positions. Whether that can happen while a loan remains below its liquidation threshold depends on eligibility rules still to come.

Contributors introduced Lido Lend on Oct. 7 as a modified fork of Morpho Blue with isolated lending markets, targeting leveraged borrowing strategies and conservative lenders. Its proposed markets pair price-correlated assets, including $ETH and wstETH, the wrapped version of Lido’s stETH staking token. The project still requires DAO acceptance before mainnet launch.

In the $ETH/wstETH example, a withdrawing lender could cover an $ETH shortfall with borrower collateral. Affected borrowers would have their outstanding debt “commensurately reduced,” contributor Izzy wrote in the forum disclosure.

The post says borrowers with “highly healthy positions are much less likely to be affected.” It does not specify a cutoff that exempts healthy loans, how much collateral can be taken from each position, or the valuation and fees governing the exchange. Those terms will determine how much debt relief a borrower receives for the collateral removed.

Morpho Blue’s core contract takes a different approach: a lender withdrawal fails if insufficient loan assets remain available, rather than drawing on borrower collateral. Its liquidation function separately rejects healthy positions. Morpho’s Public Allocator can bring loan assets into a market from participating vaults, subject to their settings, caps and available liquidity.

Getting From Collateral to $ETH

An exit into collateral would not itself guarantee an immediate $ETH payout. The outline does not specify whether a lender receives transferable wstETH directly or an intermediate claim, how conversion to $ETH would work, or who bears conversion costs.

Unwrapping wstETH delivers stETH, not $ETH. Lido’s existing staking withdrawal queue accepts wstETH and issues an NFT representing the withdrawal request. $ETH becomes claimable only after finalization, which depends on available ether and a waiting period, among other conditions. That is an existing redemption route, not a finalized Lido Lend settlement design.

In its Oct. 16 X thread, Lido said the exact specifications were subject to governance approval and would be detailed in “the coming 1-2 weeks.” Contributors also said technical specifications, market parameters and audit reports would be made public as the protocol moves through governance before launch.