Lido Finance is currently facing challenges related to its EarnETH vault due to the aftermath of the KelpDAO exploit. This incident has raised concerns as it revealed that the EarnETH vault maintains approximately 9% direct exposure to rsETH. While deposits and withdrawals have been paused, Lido is actively working with vault curators to address these issues. It is important to note that the core Lido staking system remains secure, with stETH and wstETH unaffected by the exploit.
Following the KelpDAO exploit, which occurred on April 18, 2026, an attacker managed to illicitly extract 116,500 rsETH from an Ethereum side adapter, valued at about $292 million. This represented approximately 18% of the circulating supply of rsETH at that time, leading to emergency actions across various lending markets.
Lido is currently addressing two key issues stemming from the exploit. Aside from the direct exposure to rsETH, the company is also contending with a liquidity crunch in lending markets. Curators Veda and Mellow are working to stabilize these conditions by reducing leverage and managing wETH debt in strategies affected by the fallout. Through fast deleveraging, Lido confirms that EarnETH now holds positions unrelated to rsETH, improving its overall standing amid ongoing cleanup efforts.
To mitigate potential losses, Lido announced the implementation of a $3 million first loss protection mechanism, funded by the Lido DAO treasury. This protective measure would be activated in the event that EarnETH incurs a loss, with the DAO's vault shares burned to absorb the impact. Should the cleanup process exceed expectations, curators are considering introducing a last resort withdrawal mechanism. This would allow users to exit their positions early while accepting a haircut to the value of their holdings.
The broader market impact has been profound, particularly as the attacker subsequently moved the stolen rsETH into lending platforms, where they borrowed ETH against it. This move compelled Aave, a major lending protocol, to freeze rsETH and wrsETH markets on April 18. Other protocols that employ looped staking strategies have seen adverse effects as borrowing costs spiked.
Lido has clarified that its DVV and EarnUSD vaults are not exposed to the rsETH issues or the resultant liquidity crisis. However, the GGV subvault that utilizes looped staking strategies is facing negative yields due to the surge in borrowing rates. For users who submitted withdrawal requests from GGV prior to the turmoil, Lido plans to honor redemptions at pre-incident valuations.
As recovery efforts progress, the Arbitrum Security Council has frozen approximately 30,766 ETH linked to the exploit, valued at about $71 million, offering hope that the final losses could be less severe than initially projected. Lido remains committed to providing public updates on recovery efforts and the allocation of losses, emphasizing transparency during this challenging period.