Variable YDF
How to provide the fair level of insurance and price of insurance for each asset at all times?
SAFU introduces a dynamic Yield Distribution Framework (vYDF), leveraging principles similar to Morpho's interest rate model. This model allows for the adaptation of the yield that depositors sacrifice, which is directly tied to the insurance level needed for various assets within the protocol.
How SAFU's Dynamic YDF Operates:
In SAFU, depositors can place any yield-bearing token into the protocol, opting to sacrifice a portion of their yield to receive an insured version of their asset. This sacrificed yield is transferred to restakers who, in return, provide the insurance cover. The dynamic aspect of the YDF is a game changing innovation; it adjusts the amount of yield sacrificed based on the insurance needs of each specific asset.
Risk curators in SAFU set an optimal insurance level for each asset, depending on its risk profile and their historic performance. For instance:
Liquid Stake Tokens might have an optimal insurance level of 10% due to lower slashing risks.
Liquid Restake Tokens could require up to 20% because of their increased AVS risk.
Stablecoins like Ethena might need a 50% coverage to ensure robustness.
sDai from Maker might be optimally insured with just 7.5%.
The dynamic model increases the yield sacrifice when the current insurance level is below the optimal, ensuring adequate protection is maintained. Conversely, when the level of protection exceeds the optimal threshold, the yield sacrifice decreases, enhancing capital efficiency for depositors.
Example of YDF Adjustments in Two Markets:
eEth from EtherFi:
Optimal Insurance Level: 4.5%
Restaked Asset: USDe from Ethena
In this scenario, if the current insurance level is below 4.5%, the system will increase the yield sacrifice required from depositors. This adjustment ensures that eEth holders are sufficiently covered, enhancing trust and stability within the market.
USDe from Ethena:
Optimal Insurance Level: 50%
Restaked Asset: eEth from EtherFi
Given the higher risk profile, a 50% optimal insurance level is set. If the insurance coverage falls below this mark, the yield sacrifice by USDe depositors will rise to meet the demand for more comprehensive protection. Conversely, if coverage exceeds 50%, the system reduces the yield sacrifice, balancing risk and reward efficiently.
This approach ensures that each asset is matched with the appropriate level of insurance based on its inherent risks and market dynamics, maintaining system integrity and depositor confidence. The goal of SAFU's YDF is to optimize the balance between risk protection and yield generation, making it a cornerstone for reliable and efficient decentralized insurance.
At inception, Risk Curators and SAFU Labs will define the optimal yield sacrifice required at the target coverage level. In the long term, these decisions will transition to governance based determinations.
FAQ:
Q: If you have uncorrelated Assets, the Insurance Level would change only because price movements and not because users demand…how you solve this?
A: It's a nature feature in the SAFU protocol; if the price of your collateral (restaked) asset increases it means that the insured people now ave a higher level of insurance with the same amount of Yield being sacrificed, therefore the markets need to be able to adapt to this new scenario.
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