Slashing Mechanism

A critical component of the SAFU protocol is the ability to execute slashing mechanisms when specific pre-agreed insurance conditions are triggered. These events occur when the conditions set for coverage, such as asset depegging, insolvency, or other financial failures, are met. This activates the fallback insurance provided by the protocol and ensures that restakers, who secure the AVS, are held accountable and their staked collateral is used to cover the insured party.

Each product built on top of SAFU can establish its own distinct "insurance policies," allowing flexibility in how coverage is applied. For example, Ethena's yield-bearing token USDe may focus on insuring against the insolvency of custodians holding their collateral, or against a sustained depeg of USDe itself, both of which can be monitored and enforced fully on-chain.

In the first version of SAFU, coverage will focus on loss of value against the redemption rate or depeg. These cases can be verified entirely on-chain, allowing for fast and deterministic resolution. However, the architecture also allows policies to plug in subjective arbitration from day one if needed. This means that a market could choose to adopt a more complex rule set and rely on Kleros, or another decentralized arbiter, to confirm claims that cannot be measured solely on-chain. This flexibility enables SAFU to handle both simple automated coverage and highly customized policies from the start.

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Example: sUSDe/USD Depeg

1. Policy Definition

   A risk curator creates a policy covering sUSDe/USD that triggers if the price drops 1% below peg and stays there for 72 hours. The price source is a predefined on-chain oracle.

2. Claim Submission

   Any user can submit a claim by providing on-chain proof points, as defined by the risk curator, showing that the depeg condition was met for the required time period. These points are verified on-chain.

3. Challenge Period

   Once a valid claim is submitted, an optimistic challenge period begins. The duration is defined by the risk curator, for example 24 hours. During this period, anyone can challenge the claim by submitting on-chain proof that the depeg did not occur for the required time.

4. Resolution

   • No challenge. The claim is accepted. The pool executes a unified slash on all restakers in that operator set, proportional to the loss covered. The claimant’s bond is returned.

   • Challenge. If a valid challenge is submitted, the claim is rejected and the challenger receives a reward from the claimant’s bond.

   • Optional arbitration. If the policy includes a subjective clause from the start, such as a custom market condition, the dispute can be escalated to Kleros or another arbiter integrated with the SAFU contracts. The ruling then determines whether slashing proceeds.

This flexible, transparent process ensures that slashing occurs only when coverage conditions are genuinely met. It provides fair and deterministic payouts for insured participants while enforcing accountability for restakers. At the same time, the protocol design allows custom policies to integrate decentralized arbitration at any point, even in the earliest deployments.