"The staking market has been solved, the next is lending."

Written by: Eric, Foresight News

On October 7, Lido contributor lzzy published the "Unveiling Lido Lend" proposal on the Lido governance forum, stating that it is developing a brand new decentralized lending market, built on a modified fork of Morpho Blue, aiming for a launch in the fourth quarter of this year.

Lido co-founder Konstantin Lomashuk personally backed the proposal, stating that Lido has created the most secure staking solution in the cryptocurrency space, with tokens staked through Lido now valued at over $24 billion. The issue of staking has been resolved, and the next focus is lending.

A market designed for "cautious" users

Lido Lend has chosen to fork Morpho Blue, which will emerge in 2024. It is an extremely simplified lending framework that does not create a shared liquidity pool but allows curators to create independent isolated markets with distinct parameters, thereby offering users multiple choices in collateral markets, while effectively isolating risks in the event of a hacker attack.

On this basis, Lido has made it clear that it does not intend to serve everyone. The proposal states that it targets long-term, passive holders of on-chain assets who want returns without taking on hidden risks as lenders; on the other end are professional borrowers, or cyclical leverage players. The so-called cycle is a method most familiar to stETH holders, where they use stETH as collateral to borrow ETH, then stake the borrowed ETH, and so forth, amplifying staking returns while also magnifying liquidation risks.

According to data as of August 7 of this year, Aave’s e-Mode (similar to Lido Lend's price-related asset lending) accounts for about half of the overall borrowing positions, estimated to be between $5 billion to $7 billion. However, borrowing related to ETH's e-Mode is concentrated primarily on ether.fi's weETH, and Lido aims to open a market for stETH.

Lido's proposed solution focuses collateral on blue-chip assets, and the trading pairs must be price-related. The example given by the official is stETH against ETH, where both sides follow the price fluctuations of the same asset, minimizing directional volatility.

In terms of security, Lido Lend will filter deposits of hacked funds to keep contaminated collateral outside. Additionally, Lido Lend promises that even during market pressures, elongated cyclical positions can be managed orderly. One specific commitment is regarding full utilization, meaning that when nearly all the funds in the pool are borrowed and lenders find out there's no money available to withdraw, Lido Lend still promises to maintain a reliable exit path.

However, this is merely a promise, and lzzy did not clarify how Lido Lend will achieve this in the proposal.

The core selling point of Morpho Blue is that the underlying protocol is immutable, like the pools of Uniswap v3, governance cannot modify or suspend it, and liquidity is perpetually available. In December 2023, when Morpho announced Lido's entry into its ecosystem, stETH had a market capitalization of about $21 billion, making it the largest liquid staking token on Ethereum, and at that time, Morpho Blue achieved a lending value ratio for stETH of up to 98%, compared to 90% for Aave’s eMode.

Lido Lend is a modified version of this immutable code, with an additional layer of governance from Lido DAO. However, the proposal does not specify which parts have been changed, indicating that details will be clarified in future technical posts.

Cold water in the forum

This blank check for exit commitments stems from a year filled with incidents in the lending market. In the eyes of Lido contributors, this has become a window of opportunity for creating a high-resilience lending product.

In April of this year, KelpDAO's cross-chain bridge was hacked for about $292 million, which led to bad debts traversing along the collateral chain, with Aave facing an estimated gap of about $124 million, eventually resolved through a joint rescue by various project parties called DeFi United. Further back, platforms like Morpho and Euler that lacked permission continuously exposed issues with unsecured vaults; Lido itself acknowledged these types of risks in a token holder Q&A last November. Inability to withdraw at full utilization, contaminated collateral, and cascading liquidations have been common factors in nearly every incident, and Lido Lend's design principles match these issues point by point.

For Lido itself, there is another layer of motivation. The core staking business has plateaued, and beyond the $25 billion scale, there may be little room for multiples. New product lines such as Lido Earn and stVaults are searching for a second growth curve. The proposal does not shy away from stating that low-risk DeFi is what Lido is best at building, and Lido Lend aims to complement the stETH flywheel and Lido Earn, opening up new vectors for ecosystem growth.

According to the proposal arrangements, technical specifications, market parameters, and audit reports will initially be released in a separate post before the DAO votes on the initiation and acceptance of the protocol.

From the discussions in the comments of the proposal, this may not be a quiet vote.

Ginsing pointed out in a comment that the DAO expenditures relative to the value created by new products remain extremely high, and the existing repurchase plan contributes almost no direct value to LDO holders. His suggestion is to first significantly cut costs, prove the returns of existing products, and demonstrate a sustainable profit path before discussing expansion. Another community member, jack1, was more moderate, supporting Lido's exploration of lending but laying out two conditions: keeping annual operating costs below a $30 million cap; and clarifying what proportion of new business income will be used for repurchasing and burning LDO.

On the same day as the Lido Lend proposal, the DAO released the GOOSE-2026 first-half report. The entire Lido Earn product line generated only $540,000 in annual revenue, with the official self-assessment falling short of expectations, wherein $19.5 million of the $32.1 million TVL in the EarnUSD vault came from internal transfers in EarnETH.

In the first quarter, Lido DAO recorded a net income of $9.42 million, expenses of $6.44 million, and a surplus of $2.98 million, with the Kelp rescue almost wiping out two quarters of surplus. stVaults had a TVL of only 5,768 ETH, with the official attributing this to validator queue times exceeding 70 days, making large deposits economically unfeasible, and the AI product Wisp has yet to generate any revenue, while the ETH staking market share has slipped from 23.93% at the beginning of the year to 21.18%.

The demand for lending markets for liquid staking tokens has been validated by lending protocols such as Aave and Morpho, and Lido's attempts in the lending market have no logical flaws. However, as stated by voices of opposition in the proposal, whether Lido's foray into a market that has already become a red ocean is reasonable, particularly given previous attempts did not yield great results, may require Lido Lend to provide its own answer.