Lido’s proposed exits would pay lenders with borrower collateral

Lido Lend, a proposed lending protocol from Lido contributors, could let ETH lenders shrink borrowers’ positions before liquidation if its final rules make healthy loans eligible for collateral withdrawals. Its Fallback Exits design would cover a lender’s withdrawal shortfall with borrower collateral while reducing the affected debt.

In the ETH/wstETH example in the October 16 disclosure, lenders supply ETH and borrowers pledge wstETH to borrow it. An exit into that collateral would leave the lender exposed to a staking token before obtaining ETH. Exact borrower eligibility and the token-versus-claim delivery interface remain unsettled.

Lido contributors introduced the lending project on October 7 as a modified fork of Morpho Blue built around isolated markets. In the October 16 post, contributor Izzy said technical specifications and market parameters would follow within two weeks, with governance processes and public audits still ahead of mainnet launch.

Fallback Exits would put borrowers nearest the liquidation loan-to-value ratio, or LLTV, first. Much healthier positions would be less likely to supply collateral. That language suggests a possible unwind below the liquidation threshold; final eligibility rules will determine whether those positions qualify.

The disclosure leaves the eligibility cutoff, settlement valuation, debt-offset formula, fees and limits unspecified. The choice between direct collateral tokens and an intermediate claim also remains open. Those details are consequential: eligibility determines whose position can shrink, while pricing determines the value exchanged.

For a borrower, collateral leaving the position must be considered alongside the debt removed. A borrower’s equity change and any penalty depend on the collateral valuation and corresponding debt relief.

The proposed recall risk concerns control over a position’s size as well as its solvency. If below-threshold positions qualify, staying within the borrowing limit might protect against ordinary liquidation while leaving a borrower exposed to a lender-driven reduction.

Morpho Blue’s core contract illustrates the difference. Its withdrawal function accrues interest and reduces the lender’s supplied balance. It then checks that the remaining supplied assets cover total borrowed assets. If that coverage is insufficient, the transaction reverts; a successful withdrawal transfers the loan token.

This is a market-liquidity test. Borrower collateral stays outside that withdrawal path, so a loan-token shortfall causes the withdrawal to revert. Repayment follows a separate path, bringing loan tokens into the contract while reducing debt balances.

Liquidation applies another test altogether. The contract compares debt with the collateral’s oracle value multiplied by the market’s LLTV, including its integer rounding. A position that remains within that limit is healthy, including equality in the contract’s check, and the liquidation function rejects it. A liquidator supplies loan tokens in exchange for seized collateral.