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 slashing events occur when the conditions that were set for coverage—such as asset depegging, insolvency, or other financial failures—are met, activating the fallback insurance provided by the protocol. This 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 instance, Ethena's yield-bearing token, USDe, may focus on insuring against the insolvency of custodians holding their collateral, since the demand is higher for mitigating third-party risks rather than covering potential failures in its delta-neutral strategy. On the other hand, fully on-chain protocols like Morpho or Aave might prefer insurance coverage for depegging on-chain, ensuring that market price risks are accounted for.

To assess whether the insurance conditions triggering a slashing event are met on subjective insurance policies (for instance, those that are not simply an on-chain depeg), SAFU will utilize Kleros, a subjective oracle with lower cost structures than fully intersubjective options like the EIGEN token (enormous social cost to make all EIGEN stakers decide on this) or other subjective oracles.

Kleros, being a decentralized oracle, will help determine if the conditions for slashing have been satisfied, ensuring a coherent claim and fair execution of the fallback mechanism while making SAFU Labs have no control over users' funds.

Example Slashing Flow

A first model which should enable SAFU (prev "EAGER") to abord complex insurance policies:

First, SAFU AVS would have an operator set for each insurance market;

• sUSDe/ETH

• lBtc/sUSDe

• etc

Each operator set therefore will have an arbitration policy where there is an explicit rule around the insurance/coverage safuAsset holders are getting. For example, a policy could cover sUSDe depeg until 0.8 following this oracle, and for more than X amount of hours based on Coingecko price.

That policy is uploaded to IPFS or elsewhere, and anyone can make a claim on SAFU at any time by leaving an important bond.

That claim initiates an optimistic challenge period for the claim to be accepted or not (PS: here we will have some off-chain component, like a message alert on the UI and also some direct social media communication to enable users not to make useless claims that would make them lose money), and there are two options:

A) No challenge: Aka claim is accepted

This means that the operator needs to slash the funds of the restakers who opted into that operator set accordingly to cover the 'current insolvency' from the depeg. For example, if there were $1 million restaked and the depeg was 5%, and there were $2 million who 'bought insurance', $100,000 would be slashed and redistributed. The claimant recovers the bond.

B) Challenge (someone leaves a bond to cover arbitration fees)

A challenged claim creates a dispute on Kleros, which decides whether the claim should be accepted or not, and the operators should follow the Kleros ruling.

If accepted, same as A (and the challenger loses arbitration fees while the claimant recovers the bond).

If denied, the claimant loses the bond and the challenger gets back the arbitration fees and a percentage of the bond.

This decentralized, transparent process ensures that slashing occurs only when the insurance conditions are genuinely met, providing both fair coverage for the insured and accountability for the restakers.

Ethena coverage mechanism