Lido has put forward a new mechanism called "Fallback Exit" in which, under the proposal, exits would be used to pay lenders using borrower collateral. The idea is to give lenders a route to recovery when a position can't unwind through normal channels, though the proposal leaves several key pieces unresolved.
How the Fallback Exit would work
The core of the design is simple to state: debt would be reduced alongside collateral. In other words, a borrower's outstanding debt would shrink as their posted collateral is drawn down to satisfy lenders. That pairing is meant to keep the two sides of the position moving together rather than letting one run ahead of the other. The proposal describes the mechanism at that level of principle, but it stops short of spelling out the operational details that would make it work in practice.
What the proposal does make clear is that the Fallback Exit is framed as a fallback — a secondary path rather than the default way positions wind down. That framing matters for how the mechanism would be judged by the people who'd rely on it. A fallback only earns trust if its rules are predictable before a position gets into trouble, and the current draft doesn't yet settle those rules.
The eligibility question is still open
The biggest gap is who qualifies. Eligibility criteria for healthy positions in the Fallback Exit mechanism remain unsettled, according to the proposal. That's not a minor detail. Until the criteria are defined, it's unclear which borrowers could use the mechanism, which lenders could expect to be repaid through it, and how a "healthy" position would be distinguished from one that isn't eligible at all.
Leaving eligibility open also leaves open the question of fairness between users. A mechanism that pays lenders from borrower collateral touches both sides of a position at once, and the line between an orderly exit and an involuntary one runs straight through those criteria. The proposal doesn't draw that line yet.
A lender's path to ETH is undefined
There's a second unresolved piece: the lender's route to ETH under the proposal remains unsettled. Paying lenders is one thing; getting them into ETH is another. The proposal doesn't specify how that conversion or delivery would happen, which means the end state for lenders is still an open question rather than a designed outcome.
That gap is likely to draw attention because lenders evaluating the mechanism will care about what they actually receive, not just that a repayment path nominally exists. Without a defined route to ETH, the Fallback Exit reads as a framework with its most consequential step left blank.
What the proposal leaves for next
For now, the Fallback Exit is a proposal, not a live feature. The two open items — eligibility for healthy positions and the lender's route to ETH — are the ones that will determine whether it can function as described. Until those are settled, the mechanism can't be evaluated on its merits, only on its intent.
The next concrete step is for the proposal to move from principle to specifics: defined eligibility criteria and a spelled-out path from borrower collateral to lender ETH. Those are the pieces to watch before anyone treats the Fallback Exit as a dependable backstop.
