Lido's $3M First-Loss Buffer Faces Its First Real Test After Kelp Security Breach

A security breach at Kelp has propagated through DeFi and forced Lido Finance to pause deposits and withdrawals on its EarnETH vault. About 9% of EarnETH’s assets are tied to the compromised rsETH token, prompting an immediate halt while curators assess losses. The Arbitrum Security Council has recovered roughly $70 million in ETH so far. Separately, elevated borrowing rates triggered a liquidity squeeze in looping strategies, leading curators to deleverage and cut outstanding wETH debt. Lido’s DAO holds a $3 million first-loss buffer intended to absorb losses before depositors are impacted. Market impact: heightened short-term risk aversion around Lido/Earn products, renewed focus on contagion risk across DeFi lending and restaking strategies.