safueUSDe: Insured Version of Ethena's USDe

One of the first products that could be launched on SAFU is safuUSDe, the first insured version of Ethena's USDe, secured by restaked ETH. This product provides an additional layer of protection for USDe holders by allowing them to sacrifice a portion of their yield in exchange for decentralized insurance against Ethena’s USDe depeg risk.

Restaked ETH and other liquid staking tokens (LSTs) will back the insurance, ensuring added protection for safuUSDe holders in the event of a Ethena's USDe depeg as specified on the respective coverage policy (check slashing mechanism to undesrtand the coverage dynamics and the onchain policy for checking the scope of the coverage)

PS: only ETH LSTS or LRTs not related to stEth, since is part of Ethena collateral.

Context on Ethena and USDe

Ethena is a synthetic dollar protocol built on Ethereum that provides a decentralized, crypto-native solution not reliant on traditional banking infrastructure. Its core product, USDe, is backed by a delta-neutral strategy using Ethereum and Bitcoin collateral. By opening short positions on perpetual futures contracts, Ethena hedges its exposure to price fluctuations, allowing USDe to maintain a stable value around $1. The yield generated by Ethena comes from two sources: staked ETH rewards and the funding rate from its perpetual futures positions. Currently, USDe holders can earn up to 10% APR, making it highly attractive to investors willing to accept the risks inherent in the strategy.

A delta-neutral strategy minimizes directional risk by maintaining a position’s delta at zero, balancing gains and losses from price movements. However, this strategy introduces certain risks, such as de-pegging of assets like stETH, which could trigger liquidation events and affect the value of USDe.

SAFU enables USDe holders to opt into an insured version of their stablecoin by depositing into the USDe SAFU AVS. By doing so, they will sacrifice 20% of their native USDe yield in exchange for insurance backed by restaked ETH or other LSTs, excluding stETH (which is used in Ethena's own strategies). This reduction in yield will provide USDe holders with coverage against a potential depeg event caused by failures in Ethena’s delta-neutral strategy.

Restakers of ETH and other LSTs who wish to maintain exposure to ETH price appreciation while securing Ethena’s delta-hedging strategy will benefit significantly from this model (since they would perceive Ethen'a yield as a good risk adjusted APR given they know how protocol works or simply think risk is being overpriced by the market). These restakers will receive a portion of the sacrificed yield from safuUSDe holders, effectively earning additional ETH-denominated rewards on top of their existing staking yield.

Market Dynamics and Real-Time Risk Pricing

The introduction of safuUSDe will create the first real-time prediction market on the risk of Ethena’s delta-neutral strategy. As more restaked ETH and LSTs are added to the pool, the market will price the risk of a USDe depeg based on the ratio of collateral to safuUSDe. This dynamic will provide clear insights into how the market perceives the likelihood of Ethena’s strategy failing, effectively turning the AVS into a prediction market for USDe stability.

With the current APR on USDe at 13%, almost 3x the yield of U.S. Treasury bills, safuUSDe provides an attractive option for risk-averse investors who want to hedge against the inherent risks of Ethena's strategy. As this market develops, it will offer new avenues for risk discovery and yield optimization, bringing further innovation to decentralized finance.

In conclusion, safuUSDe represents a significant step forward in DeFi insurance, combining Ethena’s delta-neutral strategy with the security of decentralized, restaked ETH. This model offers a groundbreaking solution for investors seeking both high yields and risk mitigation in the crypto space.