Risk Disclosures

Potential risks associated with blockchain protocols and digital assets include, but are not limited to:

As digital assets are based on blockchain protocols, any malfunction, breakdown or abandonment of the protocol or other technological difficulties may have a material adverse effect on or prevent access to or use of digital assets. These include, but are not limited to, the non-exhaustive list set out below:

• ineffectiveness of the informal groups of developers contributing to the protocols;
• ineffectiveness of the network validators ("miners" or "block producers") and/or of the consensus mechanisms to secure a blockchain network against confirmation of invalid transactions;
• disputes among the developers or validators;
• changes in the consensus or validation schemes that underlie a blockchain network, including, but not limited to, shifts between so-called "proof of work" and "proof of stake" schemes which negatively affect the blockchain network;
• the failure of cybersecurity controls or security breaches of a blockchain network;
• undiscovered technical flaws in a blockchain network;
• the development of new or existing hardware or software tools or mechanisms that could negatively impact the functionality of the systems;
• decrease in value of digital assets associated with a blockchain network; and
• infringement of intellectual property rights by a blockchain network's participants.

Any malfunction, breakdown, abandonment, unintended function, unexpected functioning of or attack on the protocol may have an adverse effect on the vault's deposited assets, including causing the smart contracts to malfunction or function in an unexpected or unintended manner.

Regulatory developments could negatively impact the protocol or the development or deployment of decentralized finance (DeFi) strategies or smart contracts in ways that may require a pause or restructuring.

Advances in cryptography, or technical advances such as the development of quantum computing, could present risks to cryptocurrencies and protocols by rendering ineffective the consensus mechanism that underpins the protocol, which could result in the theft, loss or decreased utility of DeFi strategies or smart contracts. Smart contracts, blockchain application software and blockchain platform protocols are still in an early development stage and relatively unproven.

Cryptographic tokens and smart contracts are a relatively new and comparatively untested technology. There are risks that cannot be anticipated. Further risks may materialize as unanticipated combinations or variations of the discussed risks or the emergence of new risks.

A "Smart Contract" is an open-source autonomous computerized algorithm capable of executing code to implement the terms of an agreement. Smart Contracts create a variety of new risks to users with no legal recourse, including, but not limited to, "Coding Errors" (where an error in the implementation of the Smart Contract causes financial loss to the users), "Rug Pulls" (where the smart contract developers intentionally create backdoors in the code to withdraw funds or cause other losses), "Governance Issues" (where the holders of the governance digital assets vote to take a decision which negatively affects the value of the funds in the smart contract), high "gas" fees (where the transaction fees to execute the smart contract climb to high levels due to demand).

Each DeFi application and protocol carries its own risks, which include:

• Liquidity Risks: Inability to withdraw funds due to insufficient liquid assets, leading to potential user damages (e.g., liquidation of other positions due to inability to access funds). Users bear the risk of liquidity shortages, and Lido or any other person shall not be liable for any resulting losses (see also below Liquid Staking Risks).
• Technical Risks: Malfunctioning of algorithms, smart contracts not behaving as intended, or inability to retrieve funds from any chain or protocol due to technical issues.
• Exploits and Hacks: Losses due to external or internal exploits, including bridge exploits, oracle manipulations, or key management failures (e.g., loss of access to withdrawal keys, leading to indefinite blocking of user funds).
• Interest Rate Spikes: Losses due to spikes in borrowing rates on leveraged positions (e.g., wstETH collateral with ETH borrow).
• Configuration Errors: Errors in adding new strategies or leaves to the vault, leading to financial losses.
• NAV and Yield Attribution Errors: Errors in net asset value (NAV) attribution, accounting, yield reporting, or misrepresenting the vault's performance.
• Oracle and Pricing Risks: Stale, missing, or manipulable price feeds causing mispriced exits or NAV misstatements.
• Governance Risks: Strategy operators acting against user interests or misrepresenting economics.

Liquid Staking Tokens (LSTs) are staking receipt tokens that allow users to directly participate in staking while also maintaining the ability to use their LSTs elsewhere in DeFi ecosystems or transfer ownership of their original staked tokens. LSTs provide increased liquidity and capital efficiency to the DeFi markets, but they are a new product with an uncertain legal and regulatory regime.

The primary risk of liquid staking is that the value of any liquid staking tokens (LSTs) may de-peg from the value of the original or underlying tokens. LSTs are not automatically pegged to the original or underlying staked tokens through algorithmic means and may trade freely on the market, where prices are determined by market forces. This includes price risk/exposure to ETH (as the base currency of the vault is stETH), the stETH/ETH basis (affected by outstanding Lido withdrawal requests, validator rewards, total ETH staked, and withdrawal queue levels), and directional or correlated exposure to ETH/stETH from vault allocations.

LSTs have an uncertain legal and regulatory regime. The legal and regulatory regime of LSTs has not been determined and there may be significant changes and developments in the future.

Finally, LSTs have lower liquidity compared to the regular or underlying tokens. While the LST market has grown significantly, LSTs do not benefit from the same liquidity as the underlying staked tokens.

Blockchain is a chronologically ordered ledger of all validated transactions across certain digital asset networks. It is shared among users for each applicable digital asset network. Each "block" in the "chain" contains a confirmed transaction. Just as the blockchain creates a public record of certain digital asset network transactions, it also creates an immutable one. Transactions that have been verified, and thus recorded as a block on the blockchain, generally cannot be undone. Even if the transaction turns out to have been in error, or due to theft of a user's digital assets, the transaction is not reversible. The blockchain may be susceptible to hacking or other attacks that seek to manipulate the ledger. Blockchains that are less established or not as widely used are typically more susceptible to these types of attacks.

Blockchain technologies, digital assets, and digital asset sales are rapidly evolving areas from a regulatory, technology and utility perspective. Due to the technically complex nature of the blockchain networks and platforms created by new projects and companies, they may from time to time face unforeseeable and/or unresolvable difficulties. Accordingly, the development of the blockchain networks or platforms could fail, terminate or be delayed at any time for any reason (including, but not limited to, the lack of funds). Such development failure or termination may render the digital assets untransferable, reduced, with no utility or obsolete.

Open-source blockchain networks use a cryptographic protocol to govern the peer-to-peer interactions between computers. The code that sets forth the protocol is typically informally managed by a development team known as the core developers. Some of the inherent risks include:

• core developers may propose amendments to a network's source code through software upgrades that alter the protocols and software of the network and the properties of the underlying digital assets. To the extent that a significant majority of the users on a network install such software upgrade, the network would be subject to new protocols and software that may adversely affect its value;
• core developers and contributors are generally not directly compensated for their contributions in maintaining and developing the network protocol. Consequently, there is a lack of financial incentive for developers to maintain or develop the blockchain network and the core developers may lack the resources to adequately address emerging issues with the protocol. Even if a protocol is currently supported by core developers, there can be no guarantee that such support will continue or be sufficient in the future;
• the source codes may contain bugs, defects, inconsistencies, flaws or errors, which may disable some functionality, create vulnerabilities or cause instability in the network.

The number of digital assets traded for a given network and the number of venues available for trading may be very low, making the market price of the digital assets more easily manipulated. While the risk of market manipulation exists in connection with any markets, the risk may be greater for digital assets.

The price of digital assets has fluctuated widely over the past few years and is likely to continue to experience significant price fluctuations. Digital asset markets have historically experienced extended periods of flat or declining prices, in addition to sharp fluctuations. The global market for digital assets is characterized by supply and demand constraints that generally are not present in the markets for commodities or other assets such as gold and silver. There is no assurance that digital assets will maintain their long-term value in terms of future purchasing power or that the acceptance of digital asset payments by mainstream retail merchants and commercial businesses will continue to grow.

A private key, or a combination of private keys, is necessary to control and dispose of digital assets stored in digital wallets or vaults. This includes private keys associated with vault multi-sigs, where loss or compromise could result in indefinite loss of user funds. Accordingly, loss of requisite private key(s) associated with these digital wallets or vaults will result in the loss of such digital assets, and the private key will not be capable of being restored by the network.

If a malicious actor or botnet obtains control of more than fifty percent (50%) of the processing power on a network, such actor or botnet could manipulate the network. If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining on a network, it may be able to alter the blockchain on which the network and most transactions rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions. The malicious actor could "double-spend" its own digital assets and prevent the confirmation of other users' transactions. To the extent that such a malicious actor or botnet did not yield its control of the processing power on the network or the community did not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible.

Cryptography is evolving, and security, in general, cannot be guaranteed to exist at all times. Advancement in cryptography technologies and techniques, including, but not limited to, code-cracking, hacking and the development of artificial intelligence or quantum computers, could be identified as risks to all cryptography-based systems, including digital assets themselves. When such technologies or techniques are applied, adverse outcomes such as theft, loss, disappearance, destruction, devaluation or other compromises of digital assets may result. Hackers or other malicious groups or organizations may attempt to interfere with the digital assets in a variety of ways, including, but not limited to, malware attacks, denial of service attacks, consensus-based attacks, Sybil attacks, smurfing and spoofing. Further, many networks rely on open-source software and un-permissioned distributed ledgers. Accordingly, anyone may intentionally or unintentionally compromise the core infrastructural elements of a network and its underlying technologies. Consequently, such compromise may result in the loss of digital assets. Therefore, the security of digital assets cannot be guaranteed, due to the unpredictability of cryptography or security innovations or interference by hackers or other malicious groups or organizations.