Lido contributors are considering a withdrawal mechanism that would allow lenders on the proposed Lido Lend protocol to receive borrower collateral when a market cannot return enough of the loan asset. The design, called Fallback Exits, would reduce the affected borrower’s debt at the same time, potentially offering lenders a way out before a conventional liquidation occurs. The rules governing eligibility, pricing and settlement have not yet been finalized.
How the proposed exits would work
Lido Lend was introduced on October 7 as a modified fork of Morpho Blue, with isolated lending markets. In the example described in an October 16 disclosure, lenders provide ETH while borrowers deposit wstETH as collateral and borrow ETH. If a lender seeks to withdraw ETH but the market does not have enough available, a Fallback Exit could instead transfer some of the borrower’s collateral to that lender and offset part of the borrower’s debt.
That would create a different path from an ordinary withdrawal. Under Morpho Blue’s standard withdrawal process, the contract reduces the lender’s supplied balance only after checking that the remaining loan assets are sufficient to cover outstanding borrowing. If the coverage test fails, the withdrawal transaction reverts. Borrower collateral is not part of that normal liquidity check.
The proposed Lido mechanism would connect the lender’s withdrawal problem to the borrower’s position. Positions closest to their liquidation loan-to-value ratio, or LLTV, would be considered first. LLTV is the maximum borrowing level supported by the value of a position’s collateral. However, it remains unclear whether only unhealthy or near-liquidation loans would qualify, or whether some healthier positions could also be reduced.
The unresolved details include the eligibility cutoff, how the collateral would be valued, the formula used to reduce debt, applicable fees and any limits. The project also has not settled whether lenders would receive wstETH directly or an intermediate claim representing the collateral. Those choices will determine which borrowers are affected and how much value a lender receives.
For borrowers, the result would depend on the relationship between the collateral removed and the debt cancelled. A position could become smaller without being liquidated, but the borrower’s equity and any penalty would depend on the valuation applied to both sides of the transaction. A borrower whose position remains below the liquidation threshold could therefore still face a lender-driven reduction if the final rules allow healthy loans to participate.
Why receiving wstETH is not the same as receiving ETH
A lender receiving transferable wstETH would not automatically have immediately usable ETH. wstETH is a staking-related token whose balance remains fixed through oracle reports while its entitlement to stETH changes. Unwrapping it produces stETH, but neither step by itself guarantees a particular amount of ETH in an open-market sale.
The accounting value used to cancel a borrower’s debt could differ from the price a lender can obtain when selling the received collateral. Executable market prices and transaction costs would affect the eventual ETH proceeds. This distinction matters because the proposed settlement could solve a lending-market withdrawal shortfall while leaving the lender to manage the conversion into ETH.
Another possible route is Lido’s existing withdrawal queue. A holder can submit wstETH, which is unwrapped into stETH, and receive an unstETH non-fungible token representing the request. After finalization through an oracle report, the holder can claim reserved ETH. The process depends on available ETH, elapsed time and share-rate conditions. While queued, the tokens stop earning rewards and remain exposed to losses that could reduce redemption value.
Existing withdrawal requests are capped at 1,000 stETH, while wstETH requests are checked using their stETH equivalent. Larger requests can be split. Those limits apply to Lido’s current staking-withdrawal system; the limits for Fallback Exits have not been specified, and it is not yet clear how a lender receiving collateral would enter the queue.
Project status and current market picture
Lido contributor Izzy said in the October 16 disclosure that technical specifications and market parameters were expected within two weeks. Governance procedures and public audits were still required before a mainnet launch, according to the disclosure. The proposal therefore remains subject to further design decisions rather than representing a finalized operating rule.
The comparison with Morpho highlights the trade-off. Morpho’s Public Allocator V2 documentation describes moving eligible loan assets from participating vaults into a target market to support a larger withdrawal. That option depends on permissions, caps, available assets and vault settings, and a caller may face a penalty. Lido’s proposed route would instead allow an exiting lender to accept exposure to borrower collateral.
For lenders, the key questions are what asset they receive, how it is valued and how quickly it can be converted into ETH. For borrowers, the central issues are whether their position qualifies and how much debt is removed for the collateral taken.
Moneyiar market data at 11:59 a.m. Tehran time on October 21, 2026, showed Ethereum at $2,467.4889729949, up 3.63% over 24 hours but down 1.39% over seven days. At 11:58 a.m., Lighter was priced at $3.3988815355, up 7.43% in 24 hours and 1.62% over seven days. Nexus stood at $0.0000006836 at 11:59 a.m., up 2.73% over 24 hours and down 10.65% over seven days. Moneyiar data listed WOULD at $0.0351412837, with a 0.33% daily rise and a 10.6% seven-day gain, based on a September 22 timestamp.
The proposal was originally reported by CryptoSlate.
