# wstETH/ Aave GMC Risk Analysis Process

# Section A: Underlying Assets

## 1. Asset Risk

### 1.1 Fundamental Asset Characteristics

At its essence, wstETH is designed to offer a more stable and DeFi-friendly version of stETH. While stETH periodically adjusts balances to reflect staking rewards, wstETH takes a different approach. It maintains a fixed balance that represents a consistent share of the total staked ETH pool in Lido. This stability makes wstETH particularly attractive for use in various DeFi applications, where constant rebasing can create complications.

The token's adherence to the ERC-20 standard ensures seamless integration with a wide array of Ethereum-based protocols. wstETH has expanded its presence beyond Ethereum to include several L2s: Arbitrum, Optimism, Scroll, Base, Linea, ZKSync, Mantle, Polygon PoS, Mode and BNBChain.

As of February 2025, wstETH has established itself as a major player in the cryptocurrency market, boasting a market capitalization of approximately $11.2B. However, it's crucial to note the high concentration of ownership among top holders on Ethereum. Aave V3 has a significant stake, controlling over 21% of the supply, followed by Spark with about 20%. The top 20 wstETH‐holding addresses collectively account for just over seventy percent of the total supply.

### 1.2 Architecture

wstETH is directly underpinned by Ethereum staked through the Lido protocol. This means that for every wstETH token in circulation, there's an equivalent amount of ETH staked in Lido's pool. Instead of relying on complex arbitrage mechanisms, external price feeds, or dynamic supply adjustments to maintain its value, wstETH's worth is intrinsically tied to the ETH staked in Lido.

Source: [Oxorio](https://oxor.io/blog/2024-02-01-lido-decoded-a-deep-dive-into-ethereums-liquid-staking-solution/), Date: February 21, 2025

Following Ethereum's Shapella upgrade, users can now unwrap their wstETH into stETH and then redeem it for ETH through Lido's withdrawal mechanism, creating a full circle of liquidity.

When users wrap their stETH to obtain wstETH, they're essentially locking their stETH in the wstETH contract. This locked stETH serves as the backing for the newly minted wstETH tokens. The amount of wstETH received is calculated using a [share bookkeeping formula](https://docs.lido.fi/guides/lido-tokens-integration-guide/#bookkeeping-shares), ensuring that the wrapped tokens accurately represent the user's stake in the pool.

Unwrapping follows a similar, yet inverse process. When a user decides to unwrap their wstETH, the tokens are burned, and the corresponding amount of stETH is released from the contract. It's important to note that due to the rebasing nature of stETH, the amount of stETH received upon unwrapping may differ from the initial amount wrapped. This difference reflects any staking rewards accrued during the time the tokens were wrapped.

Interestingly, the wstETH contract offers a shortcut for users looking to stake their ETH directly for wstETH. `receive()` method allows users to bypass the intermediate step of first obtaining stETH, streamlining the process of entering the liquid staking ecosystem. However, even when using this shortcut, the underlying [staking rate limits](https://docs.lido.fi/guides/lido-tokens-integration-guide/#staking-rate-limits) still apply.

### 1.3 Tokenomics

Unlike many tokens that rely on pre-allocation or airdrops, wstETH's supply is entirely organic, driven by user demand and interaction with the Lido protocol. As a non-rebasing asset, it's value is a function of the underlying ETH and its staking earnings. 1 wstETH is currently worth 1.19 ETH. When we look at how wstETH comes into existence, it's through a straightforward process of users choosing to wrap their stETH.

The protocol currently collects a 10% fee on staking rewards, split evenly between node operators and the protocol treasury. This fee is implemented through the minting of new stETH shares, which are then assigned to the fee recipients. While this doesn't directly impact the wstETH token, it does affect the underlying stETH that wstETH represents. The fee structure is modifiable through DAO voting.

Lido has its own governance token called LDO. This token is used to govern the Lido DAO, which oversees parameters for Lido staking, node operator selection, fee structures, and upgrades to the protocol.

## 2. Arbitrum Market Outlook

### 2.1 Asset Liquidity

The total available liquidity on Arbitrum stands at $1.8M, with a 16.8% decline recently. Over the past 30 days, the trading volume reached $13.3M, suggesting active usage despite the declining liquidity.

Source: [DEX Guru](https://dex.guru/liquidity/token/arbitrum/0x5979d7b546e38e414f7e9822514be443a4800529), Date: February 19th, 2025

The most significant liquidity pools include:
• wstETH/axl-wstETH with $1.84M, which is the largest pool, likely serving cross-chain bridging or interoperability purposes.
• wstETH/ETH pools collectively holding over $4.2M, spread across multiple AMMs including Balancer and Uniswap.
• wstETH/USDC with $585,000, offering a stablecoin trading route.

The majority of wstETH liquidity is concentrated in Uniswap V3 ($1.18M), with smaller allocations across Ramses, SushiSwap, and Camelot.

The wstETH liquidity on Arbitrum is not deep enough to support large trades efficiently. A swap of 5,000 wstETH for USDC results in extreme slippage (of up to 75%).


Source: [LlamaSwap](https://swap.defillama.com/?chain=arbitrum&from=0x5979d7b546e38e414f7e9822514be443a4800529&tab=swap&to=0xaf88d065e77c8cc2239327c5edb3a432268e5831), Date: February 19th, 2025

This presents a limited risk as arbitrageurs will bring liquidity to wstETH pools from other networks to Arbitrum. With that being said, it still presents a risk should Arbitrum DAO need to exit their wstETH position quickly. A preferable solution would be to unstake it, which would provide a better redemption rate on this larger position. It would still take one day to process, presenting a potential risk.

### 2.2 Volatility

Generally, wstETH maintains a stable peg to ETH, with minimal price deviations from its predicted rate increase. A large depeg event in 2022 was caused by limited liquidity and high leverage forcing sales. Withdrawals have since been activated, resulting in a far more reliable peg.


Source: [Coingecko wstETH/ETH](https://www.coingecko.com/en/coins/wrapped-steth/eth), Date: February 19th, 2025

Over the past 30 days, wstETH has experienced a price decrease of approximately 18.56%, aligning with broader market trends affecting ETH. During this period, wstETH recorded a price volatility of 9.35%, indicating moderate fluctuations in its value.

### 2.3 Exchanges

stETH is available on several centralized exchanges (CEXs), such as Bybit, Bitget, OKX, MEXC Global, HTX and Gate.io that allow users to trade it directly.

In contrast, wstETH has no CEX support and remains traded on decentralized exchanges.

### 2.4 Growth

Lido has experienced substantial growth in TVL, currently standing at 9.3M ETH - a highlight of the protocol's dominant position in Ethereum staking.

Source: [DefiLlama](https://defillama.com/protocol/lido?denomination=ETH&events=false), Date: February 21th, 2025

TVL fluctuations do not directly impact dev activity, which remain above 200 per period, showing continuous improvements to staking mechanisms and integrations.

Source: [DefiLlama](https://defillama.com/protocol/lido?events=false&devCommits=true&groupBy=monthly), Date: February 19th, 2025

## 3. Asset Technological Risk

### 3.1 Asset Smart Contract Risk

Since its inception in 2020, Lido on Ethereum has undergone multiple comprehensive auditing processes. The scrutiny applied to Lido's infrastructure has been particularly intense since 2023, with the introduction of the Lido V2 codebase. Firms such as Oxorio, Statemind, Hexens, MixBytes, and Certora have been auditing the protocol.

[Recent audit results](https://github.com/lidofinance/audits) provide a granular view of Lido's current security posture.
- [MixBytes Lido a.DI Audit](https://github.com/lidofinance/audits/blob/main/bsc/MixBytes%20Lido%20a.DI%20Security%20Audit%20Report%2007-2024.pdf) - 2 medium, 11 low issues, all acknowledged
- [Statemind Audit of the Simple Delegation](https://github.com/lidofinance/audits/blob/main/Statemind%20Lido%20Simple%20Delegation%20audit%20report%2007-24.pdf) - 6 info issues (2 Fixed, 4 Acknowledged)
- [MixBytes On-chain Audit of Community Staking Module](https://github.com/lidofinance/audits/blob/main/MixBytes%20Lido%20CSM%20Security%20Audit%20Report%2010-24.pdf) - 10 medium issues (4 Fixed, 6 Acknowledged), 31 low issues (14 Fixed, 17 Acknowledged)
- [MixBytes Off-chain Audit of Lido Oracle v4](https://github.com/lidofinance/audits/blob/main/MixBytes%20Lido%20Oracle%20Security%20Audit%20Report%2010-24.pdf) - 3 low issues (2 Fixed, 1 Acknowledged)

Lido’s stETH and wstETH tokens have not experienced any successful exploits or hacks.

### 3.2 Bug Bounty Program

Lido's [Bug Bounty program](https://immunefi.com/bug-bounty/lido/information/) offers rewards up to $2,000,000, designed to incentivize the identification and reporting of critical vulnerabilities, such as loss of user funds, denial of service attacks, governance hijacks, data breaches and leaks.

The implementation of separate programs for Ethereum and Polygon demonstrates Lido's multi-chain strategy and recognition of network-specific vulnerabilities.

### 3.3 Price Feed Risk

wstETH on Arbitrum may use the following price feed:

- Chainlink wstETH/stETH exchange rate on Arbitrum: [0xB1552C5e96B312d0Bf8b554186F846C40614a540](https://arbiscan.io/address/0xb1552c5e96b312d0bf8b554186f846c40614a540) (proxy)

### 3.4 Dependency Risk

One of the primary challenges in bridging stETH to other chains lies in the token's rebasing mechanism. Most cross-chain bridges aren't equipped to handle these periodic adjustments in token balance. Consequently, users who bridge their stETH to other networks risk missing out on their staking rewards.

To address this issue, Lido has opted to use wstETH for cross-chain deployments due to its design - unlike stETH, wstETH maintains a fixed balance while still representing a claim on the underlying staked ETH and accrued rewards. Lido relies on Arbitrum’s [canonical bridging](https://github.com/lidofinance/lido-l2/blob/main/contracts/arbitrum/README.md) system for transferring assets between Ethereum mainnet and Arbitrum.

Lido DAO shall officially recognize bridged wstETH endpoints through governance voting. This process, typically conducted via snapshot votes, has already been implemented for Base, ZKSync, Mantle, Linea, Scroll, and Mode.

Lido's reliance on independent oracle daemons to synchronize data between Ethereum's Consensus and Execution layers introduces a potential point of failure. These oracles are responsible for regular updates, typically set to occur every 225 epochs (approximately one day). In scenarios where the Consensus Layer experiences a lack of finality, these oracle updates may cease, potentially disrupting the rebasing process for stETH.

Furthermore, Lido has implemented sanity checks within its system to prevent extreme fluctuations in APR or total staked amounts. While these checks serve as a safety mechanism, they could potentially lead to operational disruptions if triggered, i.e. manifest as incorrect reward distributions or liquidity mismanagement.

## 4. Counterparty Risk

### 4.1 Governance and Regulatory Risk

Lido DAO oversees critical parameters such as setting fees, assigning node operators, and selecting oracles. Decisions are made through the collective voting power of LDO token holders.

The Lido DAO voting process follows a structured governance model with three main stages: proposal discussion, off-chain voting, and on-chain execution. It begins with community members submitting ideas for discussion on the [Lido Research Forum](https://research.lido.fi/), where proposals remain open for feedback for at least seven days before advancing. Once refined, proposals move to Snapshot for off-chain voting, requiring a minimum of 1,000 LDO tokens to be submitted. Voting lasts seven days, with approval requiring a simple majority and a quorum of at least five percent of the total LDO supply. If a proposal passes Snapshot and involves smart contract changes or fund allocations, it moves to an on-chain vote through Aragon. The on-chain voting phase lasts 72 hours, split into a 48-hour main phase where votes are cast and a 24-hour objection phase allowing last-minute adjustments. Once approved, the proposal is automatically executed.

Recognizing the potential impact of decisions on stETH holders, Lido is considering implementation of a dual governance mechanism. This system would empower stETH holders to veto proposals they deem harmful, ensuring their interests are safeguarded. If a veto is exercised, it triggers a cooldown period, allowing stETH holders to exit the protocol before the proposal is enacted.

Because Lido operates as a decentralized protocol without a central entity, there isn't a specific jurisdiction that governs it or its assets like wstETH. The protocol's governance is executed through code and community consensus rather than traditional legal frameworks. The partial use of the Cayman Islands as a legal base (based on references in the [Terms of Use](https://lido.fi/terms-of-use)) is a common approach for crypto projects, as it offers certain regulatory advantages. However, this doesn't necessarily shield the organization from all regulatory scrutiny. The concentration of node operators in Europe might be a significant potential risk due to the fact that geographic concentration could create a regulatory weak point.

### 4.2 Access Control Risk

[Lido DAO Agent](https://etherscan.io/address/0x3e40D73EB977Dc6a537aF587D48316feE66E9C8c), representing the collective will of Lido stakeholders, has the ability to execute upgrades to the wstETH contract (through upgradable proxy). The agent's authority extends to TokenRateOracle and token bridge contracts which are also designed to be upgradable.

I. GateSeal Committee: [0x8772E3a2D86B9347A2688f9bc1808A6d8917760C](https://app.safe.global/transactions/queue?safe=eth:0x8772E3a2D86B9347A2688f9bc1808A6d8917760C)

Quorum: 3/6

In case of emergencies or detected malice the committee can pause:
- `WithdrawalQueueERC721`: stops users' withdrawal requests, preventing any unauthorized or harmful withdrawals.
- `ValidatorExitBusOracle`: halts Node Operators' exit requests, ensuring that validators cannot exit the network unexpectedly.

The pausing right is limited to a single use and it is set to expire on April 1, 2025.

II. Emergency Brakes (Ethereum): [0x73b047fe6337183A454c5217241D780a932777bD](https://app.safe.global/transactions/queue?safe=eth:0x73b047fe6337183A454c5217241D780a932777bD)

Quorum: 3/5

The committee manages the enabling or disabling of deposits and withdrawals for wstETH bridging to various other chains. It can also pause the Easy Track pipeline, which is essential for managing proposals and operation within the network.

III. Emergency Brakes (Arbitrum): [0xfDCf209A213a0b3C403d543F87E74FCbcA11de34](https://app.safe.global/settings/setup?safe=arb1:0xfDCf209A213a0b3C403d543F87E74FCbcA11de34)

Quorum: 3/5

Specifically oversees wstETH token bridge on the Arbitrum network with the right to disable deposits and withdrawals.

Emergency Brakes Committees with the same capacity are summoned for all L2s where Lido has presence.

IV. Deposit Security Committee - continuously monitors deposit activities and the set of Lido keys available for deposits. By signing and disseminating authorization messages, the committee controls which deposits are permitted, ensuring only valid and secure transactions occur.

If malicious node operator deposits are detected, the committee can sign a "pause" message.The committee can also sign messages to unvet keys from the Staking Module.

A supermajority of 4 out of 6 committee members is required to approve and proceed with deposits. To prevent potential collusion among members or between members and node operators, any single honest committee member has the power to halt deposits.

Current Members (Guardians): Stakefish, Kiln, Blockscape, Staking Facilities, P2P and Lido Dev Team.

# Section B: Strategy Risk

## 1. Strategy Design Risk

### 1.1 Design Risk

The strategy envisions yield generation by staking ETH with Lido to receive wstETH and then depositing wstETH into AAVE. It does not inherently involve leverage.

While the strategy is designed to pose lower risk, the principal is not inherently protected. Slashing, smart contract and operational risk should be taken into consideration. AAVE's $1.24B Safety Module is designated to serve as a risk-mitigant and buffer protection but it covers the core market (Ethereum) only.

Because Arbitrum faces certain liquidity constraints, it is probable to stake ETH on the Ethereum mainnet first and then bridge wstETH back to Arbitrum. Although this approach may introduce additional layers of complexity, it allows for greater stability. The strategy itself can be managed or unwound without depending on other processes, yet external factors such as network congestion or high gas fees can influence transaction speed and cost. On Arbitrum in particular, the availability of liquidity may determine how efficiently positions can be unwound, especially when handling substantial amounts.

### 1.2 Strategy Mechanics

After acquiring wstETH, it must be transferred to Arbitrum before depositing it into AAVE’s V3 instance. This step requires using a cross-chain bridge to move assets from the Ethereum mainnet. Arbitrum [canonical bridge](https://etherscan.io/address/0x8315177aB297bA92A06054cE80a67Ed4DBd7ed3a) stands out for its proven reliability in cross-chain operations, unlike many alternative bridging solutions that may introduce additional security vectors. Moving assets across chains also involves transaction fees on both the source and destination networks, along with any additional fees imposed by the bridge itself.

### 1.3 Economic Incentive Structure

The yield in this strategy stems from two primary sources: staking rewards generated by Lido, and interest paid by borrowers through AAVE protocol. Lido’s staking returns reflect the underlying returns from Ethereum validator rewards, while AAVE’s yield arises from borrowing fees. On top of that, deposit incentives from Lido function as emission-based rewards.

These various components can shift over time. Lido’s staking rewards depend on the prevailing Ethereum network conditions, so their rate can fluctuate if staking yields rise or fall. AAVE’s yield tracks borrowing activity; if market demand for wstETH borrowing slows, the APY would decrease. As for the emission-based incentives, their sustainability depends on how long the sponsoring projects choose to maintain or renew them. Lido’s program in particular is set to run for three 30-day phases, after which it will be re-evaluated.

wstETH borrows are usually to power leveraged restaking trades, which with the recent price depreciation from the $EIGEN token may be lower than 6 months ago. Fortunately, this strategy will be assisted by other token emissions from upcoming restaked ETH protocol token launches.

### 1.4 External Protocol Dependency Risk

The primary reliance is on liquidity and lending protocols, with AAVE and Lido at the core of its design.

The inherent risks emerge from several angles. Lido’s staking process faces the possibility of slashing if validators are penalized, which can diminish the underlying value of wstETH. AAVE, although featuring a robust Safety Module, is not immune to potential losses from large-scale market events or smart contract vulnerabilities. Another point of exposure involves bridging, since funds must be moved to and from Ethereum mainnet and Arbitrum.

Choice of a reputable bridge would be essential due to necessity to be audited and continuously tested for security. Arbitrum canonical setup is considered sufficiently safe in this regard.

These factors can directly impact the DAO’s return on investment if unexpected events slow down borrowing demand, trigger slashing, or reduce the availability of cross-chain liquidity.

## 2. Market Risk

### 2.1 Market Volatility Exposure

wstETH, like other liquid staking tokens, generally tracks ETH’s value but may deviate from a 1:1 ratio under certain conditions. If large sell orders exceed available liquidity or if there is heightened uncertainty around validators’ performance, the discount can widen. While the token has historically maintained a close correlation with ETH, such deviations are possible, especially during periods of market stress.

In severe adverse market conditions, the strategy may encounter additional pressure. A deleveraging event could diminish borrowing demand, cutting into the interest rate on Aave. At the same time, if DEX liquidity dries up, spreads between wstETH and ETH could widen, leading to further short-term price deviations. Liquidity constraints on bridges may also hamper the ability to quickly adjust positions in a downturn. With the presence of AAVE’s Safety Module and Lido’s established track record, the strategy’s susceptibility to market volatility is adequately mitigated.

### 2.2 Liquidity Risk

The strategy aims to avoid large abrupt trades, and no explicit time-bound lockups are specified.

Staking ETH on mainnet, then bringing wstETH back to Arbitrum, offers a more predictable source of liquidity and can mitigate sudden price swings. Meanwhile, the alternative strategy of swapping smaller ETH tranches for wstETH on an Arbitrum-based DEX may better suit certain operational needs but lacks formal guidelines on slippage or price impact.

### 2.3 Systemic Risk

At present, borrowing demand on Aave V3 for wstETH on Arbitrum is modest, as reflected by the low total borrowed amount and utilization rate. This subdued activity makes the market currently less prone to sharp fluctuations or forced liquidations.

Source: [AAVE](https://app.aave.com/reserve-overview/?underlyingAsset=0x5979d7b546e38e414f7e9822514be443a4800529&marketName=proto_arbitrum_v3), Date: February 21st, 2025

Although a sudden deleveraging spiral could theoretically reduce the yield by lowering borrowing demand and triggering liquidations on Aave, in practice this outcome appears less likely. One reason is the strategy’s reliance on Lido and Aave, both of which have proven track records in maintaining stable liquidity. The wstETH deposit approach itself carries minimal direct repercussions for Arbitrum’s ecosystem, so disruptions to this specific setup would not necessarily ripple across other protocols on the network.

## 3. Operational Risk

### 3.1 Strategy Smart Contract Risk

AAVE’s latest iterations (including V3.2 and V3.1) have been audited by [multiple independent security firms](https://aave.com/security). The few issues identified were minor and have either been fixed or mitigated in subsequent updates.

While AAVE’s core contracts have not suffered any major exploits, there was an incident in August 2024 where a peripheral component (the Repay Adapter contract) was targeted. Importantly, this exploit did not compromise the core protocol functionality, and corrective measures have since been implemented to prevent similar issues in non-core modules.

Lido has undergone a [series of audits](https://github.com/lidofinance/audits) by several well-respected firms—including MixBytes, Sigma Prime, ChainSecurity, Statemind, and Oxorio. The audit reports have generally concluded that Lido’s smart contracts are secure, with most issues classified as low or medium risk and all critical vulnerabilities being addressed promptly.

There are no records of any major exploitation of Lido’s core smart contracts.

Both protocols actively run bug bounty programs via Immunefi:
- [AAVE](https://immunefi.com/bug-bounty/aave/information/) - max bounty of $1M
- [Lido](https://immunefi.com/bug-bounty/lido/information/) - max bounty of $2M

### 3.2 Oracle Reliability

The strategy relies on:
- [ETH/USD Chainlink](https://arbiscan.io/address/0x639Fe6ab55C921f74e7fac1ee960C0B6293ba612) pricefeed with 0.05% deviation threshold
- [CAPO wstETH Oracle](https://arbiscan.io/address/0x87fE1503beFBF98C35c7526B0c488d950F822C0F)

### 3.3 Automation Risk

The strategy operates without relying on keeper systems or external computational processes for position management. Position rebalancing is not automated, eliminating potential risks associated with keeper-dependent mechanisms. In the event of adverse market conditions, any necessary liquidations are handled directly through AAVE's mechanisms which have a long history of functioning. There is limited automation risk.

### 3.4 Mitigation Techniques

Current market analysis indicates sufficient capacity within both Lido and AAVE to accommodate the planned deposit volumes. Specifically, [AAVE Arbitrum instance](https://app.aave.com/reserve-overview/?underlyingAsset=0x5979d7b546e38e414f7e9822514be443a4800529&marketName=proto_arbitrum_v3) demonstrates capacity with approximately 24,000 wstETH available.

The projected risk management framework incorporates Hypernative's monitoring system, which provides surveillance of both economic factors and smart contract integrity. Such an integration would prove valuable for timely strategic adjustments, optimizing transaction costs and position unwinding. If utilizing DEX liquidity as an alternative to mainnet bridging, Hypernative's tracking capabilities enable real-time monitoring of wstETH liquidity pools.

## 4. Counterparty Risk

### 4.1 Ownership Model Risk

The initiative is led by ACI (AAVE DAO's Growth Service Provider and AAVE Protocol Embassy member), though their role is specifically limited to strategy development rather than ongoing management. While the strategy maintains a non-custodial nature, its effectiveness depends on the operational parameters and performance of the underlying protocols. Both AAVE and Lido are DAO-governed, where protocol modifications require token-holder participation in governance decisions. This governance framework ensures that any proposed changes to the strategy's operational conditions must undergo a comprehensive review process. Such changes require formal governance proposals and subsequent voting procedures, conducted both off-chain and on-chain, maintaining transparency and community oversight.

The transparent nature of this process guarantees that depositors, including Arbitrum DAO, remain fully informed of any proposed or pending changes to protocol parameters. Thus allowing for taking appropriate measures should parameter adjustments trend in an unfavorable direction.

### 4.2 Access Control Risk

The [permissions book](https://github.com/bgd-labs/aave-permissions-book/blob/main/out/ARBITRUM_ONE-V3.md) details the upgradeability of each core AAVE contract on Arbitrum.

Key protocol components such as the `Pool`, `PoolConfigurator`, `RewardsController`, `RatesFactory`, `Collector`, `PayloadsController`, and `CrossChainController` are upgradeable only through governance.

DEFAULT_ADMIN and POOL_ADMIN roles are held by [Executor_lvl1 contract](https://arbiscan.io/address/0xFF1137243698CaA18EE364Cc966CF0e02A4e6327), which is responsible for core functions such as upgrading contracts and updating critical addresses like the PoolAddressesProvider. In parallel, the EMERGENCY_ADMIN role, entrusted to [Aave Protocol Guardian Arbitrum](https://arbiscan.io/address/0xCb45E82419baeBCC9bA8b1e5c7858e48A3B26Ea6), is designed to react swiftly to critical situations by pausing operations or freezing reserves. Some actions (for example, updating reserve caps or pausing reserves) can also be executed via multisig or even EOA.

The EMERGENCY_ADMIN operates through a multisig requiring five out of nine signatures to execute emergency actions. The current composition of signatories includes two risk service providers (Chaos Labs and Llamarisk), two finance service providers (Karpatkey and Tokenlogic), security service provider Certora, development service provider BGD Labs, growth & BD service provider ACI, and two DAO delegates - Ezr3al and Stable Labs.

### 4.3 Regulatory Risk

Although wstETH is unlikely to face restrictive legal classification in the immediate future, there remains a possibility that certain jurisdictions could impose stringent compliance measures on DeFi protocols.

If any protocol involved in the strategy ceases operations due to technical failures, hacks, or financial insolvency, depositors may lose access to their assets or the ability to earn yields. DeFi protocols often lack a central authority or company behind them. In case of losses due to protocol failure, there may be no legal entity to hold accountable or pursue for compensation.

### 4.4 Reputation Risk

There is no evidence in the material that Lido, AAVE, or associated entities have acted in a way that would conflict with Arbitrum’s values. On the contrary, AAVE has been operational on Arbitrum since March 2022, following the deployment of Aave V3. In July 2024 GHO was introduced on Arbitrum, enhancing accessibility, reducing transaction costs, and improving liquidity for users. As of February 2025, AAVE’s presence on Arbitrum amounts to $950M in TVL.

### 4.5 Withdraw Risk

Withdrawals from AAVE are instant, providing immediate access to wstETH holdings. For converting staked ETH positions back to ETH through Lido, the process is estimated to take between one to six days.

For faster exit Arbitrum DAO have the option to utilize DEXs, where wstETH can be converted immediately to other assets, contingent on available market liquidity.