James Watt
The Lido DAO, a leading decentralized autonomous organization in the liquid staking ecosystem, convened its quarterly Poolside Tokenholder Update in May 2026 to provide a comprehensive overview of its performance, strategic direction, and responses to recent market challenges. The update covered a wide array of critical topics, including the current state of the Ethereum staking market, the Lido protocol’s financial performance in Q1 2026, the significant impact of the April Kelp DAO rsETH incident, a reassessment of 2026 strategic targets, an in-depth review of protocol security features, and a glimpse into future initiatives. This gathering served as a vital touchpoint for the Lido community, underscoring the protocol’s adaptability and commitment to security and sustainable growth in a rapidly evolving Web3 landscape.
Lido Protocol Fundamentals: Anchoring the Liquid Staking Ecosystem
At its core, Lido maintains its position as the premier liquid staking protocol on Ethereum, enabling users to stake their ETH while retaining liquidity through the stETH token. This fundamental offering is complemented by a modular infrastructure that facilitates custom staking setups via stVaults and diverse DeFi-native yield strategies through products like EarnETH and EarnUSD. The entire Lido ecosystem operates under the governance of the Lido DAO, a collective of LDO tokenholders. Through a robust governance process, these tokenholders are instrumental in setting protocol parameters, approving crucial upgrades, managing the Lido DAO Treasury, defining strategic goals, and authorizing grants. Notably, these grants support the operations of the Lido Labs, Lido Ecosystem, and Lido Alliance Foundations – collectively known as the Lido Foundations. These Foundations, operating under defined DAO oversight, play distinct yet interconnected roles: Lido Labs focuses on codebase development and new features, Lido Ecosystem drives growth and partnerships, and Lido Alliance supports horizontal expansion beyond the scopes of Labs and Ecosystem. This multi-layered structure ensures both agile development and broad ecosystem advancement, all while maintaining decentralized governance.
The operational model of the Lido protocol is designed for efficiency and transparency. Users deposit ETH, receiving stETH in return, which can then be freely utilized across the broader DeFi ecosystem, unlocking capital efficiency. The deposited ETH is strategically allocated through the Staking Router into various Staking Modules. Ethereum staking rewards generated by these modules flow back to the Lido protocol, with a substantial 90% distributed directly to stakers. Approximately 4% (varying by Staking Module) is allocated to Node Operators for their services, with the remaining portion directed to the Lido DAO Treasury, contributing to the protocol’s financial health and long-term sustainability.
Q1 2026 Financial Performance: Navigating Market Headwinds
Despite challenging market conditions that characterized the early part of 2026, the Lido DAO reported positive operating results across all three months of Q1. This achievement highlights the protocol’s operational resilience and its ability to generate revenue even amidst broader market volatility. However, the DAO Treasury experienced a notable decline, standing at approximately $121 million as of April 30, 2026, down from approximately $157 million at the start of the year. This decrease of approximately $36.5 million was primarily attributed to two significant factors: a -$31.6 million impact resulting from the ETH price effect on the DAO’s stETH holdings and a -$5.7 million contribution made to the DeFi United initiative, a crucial response to the Kelp DAO incident. The market environment during Q1 2026 was marked by a general downturn in cryptocurrency prices, particularly for Ethereum, which naturally impacted the valuation of the DAO’s substantial stETH reserves. This period saw a broader crypto market correction, influenced by macroeconomic factors and a cooling off from previous bullish trends, creating a less favorable environment for asset valuations. The ability of the DAO to maintain positive operating results despite these external pressures speaks to the underlying strength of its revenue-generating mechanisms and prudent financial management.
The April Kelp DAO Incident: A Test of DeFi Resilience and Collaboration
April 2026 saw a significant event that sent ripples across the DeFi ecosystem: a LayerZero bridge exploit that left Kelp DAO’s rsETH underbacked by more than 100,000 ETH. LayerZero, a prominent omnichain interoperability protocol, is designed to enable seamless cross-chain communication, but this incident exposed a vulnerability that had far-reaching consequences. At the time of the exploit, the rsETH/ETH loop constituted one of the largest restaking positions on Aave, a leading decentralized lending protocol. This precarious situation placed a wide array of DeFi participants—borrowers, lenders, and numerous downstream protocols—at considerable risk of substantial losses. Lido’s EarnETH vault, which facilitates DeFi-native yield strategies, had a direct exposure of approximately $20 million to rsETH, putting its depositors in a vulnerable position.
In response to this critical situation, the Lido DAO swiftly joined a broader, coordinated industry effort known as the "DeFi United" initiative. This collaborative endeavor successfully raised approximately 132,000 ETH from major players across the DeFi space, including Aave, Ethena, Mantle, Ether.fi, and others. Demonstrating its commitment to ecosystem stability, Lido DAO contributed 2,500 stETH, valued at approximately $5.7 million at the time of transfer, to this collective rescue fund. Furthermore, the DAO approved the activation of EarnETH’s first-loss protection mechanism, resulting in the burning of EarnETH shares valued at 144 ETH. These two decisive actions were instrumental in safeguarding EarnETH depositors, ensuring they incurred zero losses from the incident. The DeFi United initiative’s success not only protected individual users but also played a crucial role in stabilizing the broader affected markets, preventing a potential cascading failure.
A notable aspect of Lido’s response was the temporary freezing of the EarnETH vault for 27 days. This decision, while impacting user liquidity temporarily, was a deliberate and strategic choice. The vault’s damage could not be accurately assessed until the resolution of the larger DeFi United effort was clear. Releasing withdrawals with an unknown haircut would have unfairly penalized early withdrawers, while allowing withdrawals at no haircut before the resolution could have jeopardized the funds of those who remained if the rescue failed. The EarnETH vault’s curator opted to await certainty regarding the extent of the damage. Once the DeFi United initiative successfully resolved the undercollateralization, confirming a 0% loss for depositors (as opposed to a worst-case scenario of up to approximately 12%), withdrawals were unfrozen and resumed normal operations. It is important to note that EarnUSD withdrawals were unaffected and remained fully operational throughout this period. Following the incident, a comprehensive postmortem was conducted, leading to an updated risk policy for Lido Earn, designed to mitigate future exposure to similar systemic risks. This policy includes stricter requirements for asset allocation, emphasizing a systemic risk process for all future decisions, and the current rsETH position in EarnETH is being unwound as it no longer meets the revised stringent risk requirements.
Navigating the Evolving Ethereum Staking Landscape
The Ethereum staking market has undergone significant shifts since the beginning of 2026, with May witnessing some of the most pronounced changes. The market can be broadly segmented into five primary categories: Simple Liquid Staking Tokens (LSTs), Exchange Staking, Delegated Staking, APR Maxis (strategies focused on maximizing Annual Percentage Rate), and Other staking methods.
A key development observed was the sharp growth in the Delegated Staking segment, primarily driven by substantial institutional inflows. Prominent entities such as Grayscale and BitMine contributed significant amounts of ETH, channeled through a limited number of node operators. This trend indicates a growing appetite among large-scale institutional players for Ethereum staking, albeit with a preference for more direct, "native" staking pathways rather than complex DeFi integrations.
Conversely, the APR Maxis segment experienced a sharp contraction. This decline was attributed to a confluence of two compounding pressures: a reduction in restaking incentives offered by EigenLayer, a leading restaking protocol, and the contagion effects of the April Kelp DAO incident. The latter triggered a widespread unwinding of leveraged staking loops across various DeFi protocols, as participants de-risked their positions in response to the market instability. The Lido protocol, while not immune to these market dynamics, felt the impact less severely than some of its peers; its total TVL (Total Value Locked) decreased by only approximately 5%, with a significant portion of this decline stemming from the same leveraged unwinding rather than a broad outflow of users from its core offerings.
The Simple LST, Exchange Staking, and Other categories remained largely stable throughout this period. Within the Simple LST segment, Lido continued to demonstrate its dominance, maintaining approximately 90% of the market share, reinforcing its foundational position in the liquid staking space.
Delving deeper into specific segments, Lido’s share within the APR Maxis segment saw a reduction from 39% in December to 29% in May. This shift was driven by several factors, including the market-wide unwinding of leveraged positions in response to the Kelp incident and the broader adjustment in restaking incentives. In the Delegated Staking segment, Lido protocol’s share improved slightly, moving from 1.0% in December to 1.3% in May. While a positive directional signal, this performance remained below the initial plan. The stVaults TVL, designed for custom institutional staking setups, stood at approximately 5,500 ETH, significantly short of its ambitious 1.05 million ETH annual target. The growth of WisdomTree’s stETH ETP holdings by approximately 23.4% year-to-date (from ~17,000 to ~21,000 ETH) offered a positive indicator of institutional interest in stETH itself. However, the overall uptake of stVaults has been slower than anticipated due to two primary factors: a prevailing preference among institutional players for the simplest available path of native staking, and the nascent stage of robust LSTfi (Liquid Staking Token Finance) solutions tailored specifically for institutional participants. Meaningful adoption of stVaults is now anticipated from Q4 2026 onward, as the institutional infrastructure and LSTfi market mature.
Strategic Reassessment and Forward-Looking Initiatives for 2026
Given the dynamic and challenging market conditions experienced in the first half of 2026, the Lido DAO acknowledged that the annual targets set in December 2025 are no longer achievable. This candid reassessment reflects a pragmatic approach to strategic planning, recognizing the profound impact of external market and ecosystem factors. Several key influences contributed to this deviation from plan, including a decline in ETH price, a network-wide compression of Annual Percentage Rates (APR), a prolonged Ethereum entry queue exceeding 50 days for new validators, and the widespread contagion effects of the Kelp incident on both Lido Earn products and Lido Core TVL. Despite these headwinds, the DAO take rate, which represents the percentage of staking rewards retained by the DAO, hit an all-time high of 6.10% in May (up from 4.96% in December, a 23% increase), following the implementation of the Curated Module fee adjustment proposal.
In light of these conditions, two overarching priorities will guide Lido’s strategy in the near term: first, to ensure the sustainability of its core staking operations, focusing on efficiency and cost management; and second, to actively explore and develop new products that leverage the Lido protocol’s established brand in security, thereby creating diversified revenue streams for the DAO. This strategic pivot emphasizes both stability in its core offering and innovation in new ventures, aiming to solidify Lido’s long-term position.
Strengthening Tokenholder Alignment and Protocol Economics
Lido protocol’s structural alignment with LDO tokenholders remains a cornerstone of its governance model. This alignment is anchored by several properties, including robust governance mechanisms, transparent financial operations, and direct participation opportunities for LDO holders. These attributes have earned Lido an impressive 12/12 score on the Aragon Token Ownership Index, an independent measure of decentralization and tokenholder influence, signifying a high degree of tokenholder empowerment and protocol health.
To further enhance this alignment and bolster the LDO token’s economic utility, the Lido DAO has been actively pursuing an LDO Accumulation Program. Batch #1 of this program, approved by Lido DAO via Snapshot, requested 1,000 stETH from the Treasury for discretionary trading. As of the time of the update, 471 stETH had already been deployed into LDO at an average price of $0.3745. Batch #1 is scheduled to close on May 29, with full results to be published on the research forum within a week thereafter. Following this, contributors will evaluate the program’s effectiveness and propose future steps, including potential refinements to its parameters.
Building on these efforts, the DAO is also progressing with the Network Economic Support Tokenomics (NEST) Automated Buyback Architecture. NEST is an innovative, rule-based on-chain mechanism specifically designed to acquire LDO under favorable market conditions and when the Lido protocol generates surplus revenue. This mechanism creates a direct, programmatic link between the protocol’s performance and the LDO token, ensuring that a portion of surplus revenue is automatically deployed into LDO buybacks and for establishing DAO-owned LDO/wstETH liquidity. The design and parameters of NEST were comprehensively approved by the DAO through a Snapshot vote. NEST operates in two distinct modes: LP (Liquidity Provider) mode, which is the proposed launch configuration, where LDO is paired with wstETH and deployed as DAO-owned liquidity in a Curve v2 NG pool; and Treasury mode, where acquired LDO goes directly into the DAO treasury. Switching between these modes requires an on-chain vote, ensuring decentralized control over the mechanism’s operation. With the NEST design now approved, the next critical step is its on-chain deployment, which is tentatively expected to occur in July following a formal DAO Aragon vote. The LDO Accumulation Program will continue to execute in parallel, unless the DAO decides to pause its Easy Track motions.
Lido’s Unwavering Commitment to Security
In an era where security is being fundamentally repriced across the DeFi landscape, the Lido protocol’s long-standing position in simpler, well-audited staking solutions is being increasingly validated. This re-evaluation of risk is evident in third-party product decisions, such as SparkLend accepting only wstETH as collateral for high-leverage ETH borrowing in e-mode, signaling a clear preference for robust, battle-tested liquid staking derivatives.
Security is not merely a feature but the central pillar of Lido protocol’s design and development. Since its launch in 2020, the protocol has maintained an impeccable record, with no staking user funds ever being lost. This track record is reflected in its consistent top-tier ratings (Grade A or A+) across major third-party security and risk assessments, underscoring its robust defenses. The protocol’s comprehensive security architecture operates across seven sequential layers: Spec and Research, Development, Audits, Release, Voting, Post-release monitoring, and Incident Response. This multi-faceted approach ensures that security considerations are integrated at every stage of the protocol’s lifecycle.
A critical insight guiding Lido’s security philosophy is the recognition that most failures in the industry trace back to the human layer, rather than inherent code flaws. To mitigate this, Lido contributors have implemented a stringent approach that limits the actions any single individual can take and relies heavily on automated circuit breakers. These circuit breakers are designed to contain potential damage from a compromised person, preventing any single point of failure from causing catastrophic loss. Multisig signing thresholds are carefully scaled according to the value and access privileges associated with each wallet, ensuring proportional security. Crucially, the DAO retains ultimate control. Even multisigs with specific protocol roles are restricted to taking defensive actions, such as pausing or turning off contracts; they cannot unilaterally resume or alter them. Furthermore, any pauses are time-limited, and any substantive change to the protocol necessitates a full on-chain vote, reinforcing decentralized control and security.
The Kelp incident served as a stark reminder of how composability, while a powerful feature of DeFi, can expose even a well-secured protocol to the mistakes or vulnerabilities of others. Lido’s approach to owning more of the technology stack, thereby reducing external dependencies, is evaluated on a case-by-case basis. This decision-making process is guided by three core criteria: assessing the critical nature of the component, evaluating the potential for systemic risk if not controlled internally, and considering the strategic advantage of vertical integration.
Venturing Beyond Staking: New Frontiers for Lido DAO
In addition to its focus on maintaining sustainable staking operations and tightening costs, the Lido DAO is actively exploring new product avenues. The strategic goal is to leverage Lido protocol’s strong brand reputation for security to create novel revenue sources for the DAO. Several innovative concepts are currently in various stages of prototyping and ideation, demonstrating Lido’s commitment to continuous innovation and expansion within the Web3 space. Further details on these initiatives will be shared as they progress through customer validation and move closer to public release.
The first product to reach public preview from these new ventures is Wisp: Confidential AI. Wisp is an AI harness that utilizes confidential Large Language Models (LLMs), executing prompts within an attested hardware-sealed Trusted Execution Environment (TEE). This innovative design ensures that user identity, all files, and stored memory remain securely on the user’s local machine, addressing paramount concerns about privacy and the handling of sensitive information in AI interactions. Wisp emerged from a familiar pattern within the Lido ecosystem: contributors initially developed the solution to meet their own operational privacy needs, finding existing AI tools insufficient. Recognizing its broader potential, the project is now being explored for external use cases. A public waitlist is currently open at usewisp.io for those interested in exploring this cutting-edge confidential AI solution. This venture into AI, with a strong emphasis on privacy and security, represents a strategic diversification for Lido, aligning with its core values while exploring new technological frontiers.
Outlook and Future Engagements
As the Lido DAO continues to adapt to the evolving DeFi landscape, additional DeFi products are being prototyped, designed to leverage the protocol’s established security track record and generate new revenue streams. These earlier-stage concepts are being kept confidential until they undergo thorough validation, ensuring that only robust and well-vetted solutions are brought to market. The Lido Poolside community calls are held monthly, with more comprehensive Tokenholder Update sessions conducted quarterly. The community is encouraged to subscribe via Luma for updates on upcoming events and to remain engaged with the protocol’s progress.
This material is for informational purposes only and is not investment, legal, business, financial, or tax advice. No representation or warranty, express or implied, is made as to its accuracy, completeness, or timeliness. No information in this material should be interpreted as a recommendation or relied upon as a guarantee of any specific outcome. Past performance is not indicative of future results. Any opinions or forward-looking statements reflect the current judgment of the Foundations as of the date of this publication and are subject to change without notice. Parties should conduct their own independent evaluation before making any decisions.
