Governance

SAFU was borned as a DeFi first protocol that enables to act as insurance provider, relying on market driven mechanisms. for protocol to be as attractive as possible in terms of Product Market Fit, we need well established and ratinoal parameters, which will be determined by SAFU governance thanks to the introduction of SAFU.

The SAFU token will be the governance cornerstone of SAFU Protocol, playing a critical role in maintaining the balance between asset holders and restakers across all products built on top of the SAFU. These products include BUIDL from BlackRock, eETH from EtherFi, USDe from Ethena, and any yield-bearing asset out there.

SAFU holders have 3 primary responsibilities that ensure the smooth operation of the protocol and the flexibility to adapt to changing market conditions, without compromising the solvency of underlying collateral:

1. Yield Distribution Control

SAFU holders are empowered to adjust the variable yield distribution model between asset holders (e.g., safuUSD, safueETH, safuUSDe) and restakers who provide decentralized insurance. This includes determining both the optimal coverage level for each asset and the optimal yield sacrifice for each market. These adjustments aim to balance risk and return, ensuring attractive, risk-adjusted yields for all participants.

Initially, the baseline distribution for each product is defined by SAFU Labs in collaboration with risk curator partners. For example, an initial allocation might dedicate 80% of the yield to asset holders and 20% to restakers. However, SAFU holders will be responsible for dynamically fine-tuning these distributions based on evolving market conditions and risk assessments.

Examples include:

• BUIDL (Blackrock T-Bill): Optimal Coverage Level and therefore yield adjustments will depend on U.S. Treasury rates, influenced by Federal Reserve interest rate decisions.

• eETH: Distribution must adapt to Ethereum staking yields and account for the risk of validator slashing events in EtherFi.

• USDe: Yield dynamics will reflect funding rates in perpetual contracts on centralized exchanges (CEXs), which are integral to Ethena’s delta-neutral strategy.

By continuously evaluating market data and risk profiles across various assets and collateral types, SAFU holders play a critical role in optimizing coverage levels and yield sacrifices to maintain sustainable and competitive returns for both asset holders and restakers.

2. Market Curation

At inception, market creation will be permissioned, meaning SAFU holders will be responsible for selecting, via governance, which yield-bearing tokens and collateral assets are accepted in a specific market. This decision is crucial to ensure that the selected assets generate meaningful yield and that the collateral is not correlated with the "safeguarded" or wrapped asset.

This approach is key to attracting sticky and reliable TVL from restakers while providing clear rules and risk-adjusted returns (Gauntlet).

In the long run, we aim to create permissionless markets, and SAFU holders will need to determine which ones are displayed on SAFU’s UI, following a model similar to Pendle’s and Morpho’s approach.

3. Fee Switch Activation

In addition to controlling yield distribution and market curation, SAFU holders will manage the activation of the fee switch, deciding when and how a portion of the yield is directed to themselves as governance participants. For instance, in a scenario where safuUSD generates a 5% yield, the distribution might be adjusted to allocate 50% to safuUSD holders, 45% to restakers, and 5% to SAFU holders. However, these decisions must be made carefully to ensure the protocol remains compliant with regulatory standards and does not risk being classified as a security.

To maintain balance, the protocol caps the maximum yield distribution to SAFU holders at 50%. Decisions around the fee switch are also safeguarded by the DAO’s constitution, and any governance changes are enforced using Kleros SafeSnap, ensuring the principles of decentralized governance are respected and the protocol remains resilient against governance attacks.

As the SAFU Protocol continues to expand its suite of products and assets, the governance role of SAFU holders will be increasingly vital. Their ability to dynamically adjust yield distribution across different asset classes and collateral types, while responding to shifts in market dynamics such as Federal Reserve interest rates, CEX funding rates, and Ethereum staking yields, will be key to the protocol’s long-term sustainability and growth.