> For the complete documentation index, see [llms.txt](https://safu-protocol.gitbook.io/safu/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://safu-protocol.gitbook.io/safu/safuusd-an-example-of-a-product-you-could-built-on-top-of-safu/safuusd-1st-hybrid-stablecoin.md).
# safuUSD: 1st hybrid stablecoin
The SAFU Protocol facilitates the issuance of safuUSD, a stablecoin built on a dynamic economic security model where Ethereum restakers provide additional security by opting into the safuUSD Actively Validated Service (AVS). This model not only secures the stablecoin with decentralized insurance (via ETH or other ERC20s) in the event of black swan events affecting traditional finance but also fosters a responsive and adaptive economic environment that can react to shifts in market stability and regulatory changes.
Protocol Design (Non-Technical Overview)
The SAFU Protocol facilitates the issuance of safuUSD, a stablecoin built on a dynamic economic security model where Ethereum restakers provide additional security by opting into the safu USD Actively Validated Service (AVS). This model not only secures the stablecoin with decentralized insurance (via ETH or other ERC20s) in the event of black swan events affecting traditional finance but also fosters a responsive and adaptive economic environment that can react to shifts in market stability and regulatory changes.
Users can deposit BUIDL or USDC into the SAFU Protocol’s deposit contract in exchange for safuUSD. Holders of safuUSD can either keep it in their wallet to passively earn most of the yield from U.S. Treasury bills or wrap it into wsafesUSD to engage with DeFi platforms and earn additional rewards. At any time, users can redeem 1 safeUSD for 1 BUIDL token, with the protocol accepting 1 BUIDL as equivalent to 1 USD.
The core SAFU contract handles both the principal and the yield generated from the BUIDL tokenized fund, which is derived from U.S. Treasury bills. The yield is distributed through the Rewards Module contract based on the current Yield Distribution setup. Initially, 80% of the yield goes to safuUSD holders and 20% torestakers participating in the SAFU AVS. This distribution ratio can be adjusted through protocol governance.
EigenLayer adds another layer of security by leveraging restaked ETH and other accepted ERC20 tokens as a fallback in case of insolvency within the custodian banks managing the BUIDL fund. SAFU Protocol whitelists operators who can validate the "Eager" AVS. Restakers opt into these selected operators, trusting in their proper conduct and honesty.
Essentially, restakers provide ETH as a collateral pool to cover potential losses if a custodian bank becomes insolvent. In return, they receive 20% of the yield generated by the underlying collateral (the BUIDL fund). For example, if the U.S. Treasury bill rate is 5%, restakers would earn $1 annually for every $100 deposited in Eager.
Operators within the protocol are incentivized to act honestly, particularly by accurately reporting the solvency of the banks holding the underlying assets. This is crucial, as their performance and reputation are on the line, and failing to act properly could lead to significant financial opportunity cost. This is the case of Lido Permissioned [Node Operators](https://operatorportal.lido.fi/), which dont have collateral but behave appropitealy given the future rewards they will collect by doing so vs profit of being not performant enough.
In the event of an insolvency scenario, the protocol could ask operators a structured set of questions to determine the extent of the insolvency. For example, the question might be framed as a binary inquiry about BlackRock’s solvency or as a more detailed assessment of the percentage of assets that are unsound. Depending on the severity of the insolvency, corresponding amounts of restaked collateral would be slashed, with the potential for safuUSD holders to benefit if the slashed amount exceeds the insolvency shortfall. Example: A) 0% - No restaked collateral is slashed.
B) Greater than 0% but less than 2.5% - A corresponding amount is slashed if available.
C) 2.5% to less than 5% - A corresponding amount is slashed if available.
D) 5% to less than 7.5% - A corresponding amount is slashed if available.
E) 7.5% to less than 10% - A corresponding amount is slashed if available.
F) 10% to less than 15% - A corresponding amount is slashed if available.
G) 15% or more - All restaked assets are slashed, which could potentially result in a profit for safeUSD holders if the slashed amount exceeds BlackRock's insolvency.
**EIGEN TOKEN ROLE**
Additionally, at a later stage of the product, we can introduce an additional requirement of EIGEN staking to provide more security to ETH restakers by ensuring the correct behavior of Node Operators.
Operators would stake EIGEN and be penalized for poor behaviour, such as providing incorrect data about the solvency of BlackRock’s BUIDL fund.
For example:
* If BlackRock is **solvent** and operators claim it is **solvent**, operators **do not get penalized.**
* If BlackRock is **insolvent** and operators claim it is **insolvent,** operators **do not get penalized.**
* If BlackRock is **solvent** and operators claim it is **insolvent, operators get penalized** by having their staked EIGEN slashed.
* If BlackRock is **insolvent** and operators claim it is **solvent,** **operators get penalized** by having their staked EIGEN slashed.
*The following chart is an idea & for illustrative purpouses and needs to be validated with Eigen Layer Team:*
| Operators $EIGEN Slashed? | Operator claims is solvent | Operator claims is insolvent |
| ------------------------- | -------------------------- | ---------------------------- |
| Blackrock Solvent | No | Yes |
| Blackrock Insolvent | Yes | No |
#### Economic Security and Prediction Market Dynamics
The Annual Percentage Rate (APR) for restakers within the safuUSD ecosystem is determined by the Total Value Locked (TVL) and the perceived stability of the underlying assets. For instance, if the likelihood of the BUIDL fund’s de-pegging is low—owing to the risk-free nature of U.S. Treasury bills and market perceptions of smart contract risks—the required APR to attract restakers would likely be minimal, reflecting the low-risk environment. This structure creates a predictive market where stakeholders can assess the financial health and stability of safuUSD in real-time.
The market value of safuUSD is particularly important because it offers a unique way to gauge how participants with financial exposure perceive the insolvency risk of BlackRock. If opting into the AVS only adds a 0.2% risk premium but fails to attract significant TVL, it could indicate that on-chain Treasury bills are perceived as more risky than expected due to smart contract vulnerabilities. Conversely, substantial TVL in SAFU would suggest confidence in the minimal risk associated with these assets. This dynamic is similar to prediction markets, which have been successful in various contexts, such as forecasting election outcomes.
To prevent insider trading or questionable behavior by operators, the protocol will enforce a 30-day withdrawal delay for those looking to unstake their ETH (or other assets) from the AVS. Additionally, the protocol will have the capability to freeze deposits when necessary.
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## Potential Scenarios
#### Bank Insolvency
In times of financial instability, such as the collapse of Silicon Valley Bank, safuUSD’s model proves its robustness. When traditional financial systems falter, SAFU Operator’s should claim that Blacrock is unsolvent and ETH Restaked should be slashed, and given to safuUSD holders to compensate the lost amount given Tradfi Custodians unsolvency.
This structure allows for real-time APR adjustments in response to external financial shocks and news…for example:
#### Rumours on bank Insolvency
For instance if there’s a rumpur that Blackrock in insolvent but cant be confirmed (there is not social consensus ..given that in TradFi is publicly known when someone ins insolvent) , many ETH restakers may want to opt out of the platform while a lot of people will demand safuUSD;
This will increase expoinentially the APR for those who are opting into SAFU AVSs, and if they have a proper due dilligence on the underlying prodcut (example Blackrock) they could have an assymetric benefit.
#### Blackrock BUIDL risk overpriced
Let;s imagine there is a lot of demand for the stablecoin giving the market wants to be hedged to the insolvency risk of Blackrock; so there 5 million dollars of safuUSD minted on a single day, but there are only 10 ETH restaked ($2500 dollars at the moment of writing). Those 5 million dollars generate 5% yield and drive $50,000 to the SAFU restakers, which translates into a 200% APR.
Given the market is pricing tbills at risk free rate, the amount of investors that will opt into SAFU AVS will grow exponentially fast until reaching a rationale equilibrium point which translates into how likely the market is pricing a safuUSD depeg.
Transforming into a real time prediction market with no expiration.
| safuUSD minted | $5,000,000 |
| ------------------ | ---------- |
| yield | $250,000 |
| Yield to Restakers | $50,000 |
| | |
| Ether Restaked | 10 |
| Ether price | $2,500 |
| $ restaked | $25,000 |
| | |
| APR Restakers | 200% |
#### Blackrock BUIDL risk underpriced
Let;s now imagine that there are 1,000,000 safuUSD minted and 2000 ETH restaked with a price of $2,500 per Ether
| safuUSD minted | $1,000,000 |
| ------------------ | ---------- |
| yield | $50,000 |
| Yield to Restakers | $10,000 |
| | |
| Ether Restaked | 2000 |
| Ether price | $2,500 |
| $ restaked | $5,000,000 |
| | |
| APR Restakers | 0.2% |
This translates into an APR of 0.2% for Eth Restakers. Many institutional funds consider the risk of tBills being literally 0 and they could invest in audting the smart contracts of SAFU since with enormous amount of money and ETH, an extra 0.2% is good enough given you are only subjected to Blackrocks BUIDL fund.
So the yield could be inferior and have demand or even be almost 0% in terms of USD yield but have external, temporary incentives.