S&P Global Assigns B- Credit Rating to Sky Protocol Amidst Decentralization Concerns and Regulatory Risks

S&P Global Assigns Credit Rating to Sky Protocol

S&P Global, the internationally renowned credit rating agency, recently assigned a ‘B-‘ issuer credit rating with a stable outlook to Sky Protocol. This decision reflects the platform’s centralization concerns like a high concentration of depositors, centralized governance and high regulatory risk, due to uncertain regulatory frameworks for decentralized protocols. The credit rating agency also highlighted the weak risk-adjusted capitalization of Sky Protocol. Sky Protocol used to be known as Maker, a decentralized lending platform that issues the USDS stablecoin. As part of its recent rebranding efforts, Sky Protocol plans to phase out and replace its DAI stablecoin with the USDS.

Report Highlights Risks and Offsets

In the rating report published on August 7, S&P Global noted certain risks. However, these risks are somewhat offset by the protocol’s good track record of limited credit losses since 2020 and modest earnings. An upgrade in the rating within the next 12 months seems highly unlikely unless significant improvements in governance and capital position occur. A downside scenario could involve high loan losses, destabilizing liquidity or adverse regulatory moves. The credit agency, as part of its B- rating assessment, scrutinized Sky’s token liabilities. This includes the USDS and its DAI stablecoin. Other liabilities encompass savings tokens like sUSDs or sDAI. The analysts examined the risk of Sky defaulting on these tokens — defining default as a token value reduction. Key risks that might lead to such a default on its tokens could be depositor withdrawals exceeding the liquidity available and credit losses higher than available capital.

Future Outlook and Observations

S&P Global’s report observed that, despite the rapid pace of changes in the DeFi sector, Sky Protocol is undergoing a period of meaningful change. Through its Endgame roadmap, the project is making alterations to its governance and capitalization. The agency’s representative stressed the importance of monitoring these changes using on-chain data and governance transparency for its rating analysis. Any significant shift in the strategic direction or, for instance, the creation of a fork to steer the protocol into a new direction, would lead to a review. In such a case, the existing rating would only apply to the existing protocol. The market cap of Sky’s USDS steadycoin, launched after these ratings were unveiled last year, currently sits at $7.9 billion. This value ranks it fourth amongst stablecoins, trailing Tether’s USDT, Circle’s USDC, and Ethena’s USDe.

Endnote

While Sky Protocol thrives, some large-cap stablecoins still require an assessment. Among the tokens yet to be rated is the USD1. Launched by World Liberty Financial, the DeFi venture is associated with President Donald Trump and was launched earlier this year. As of the time of writing, USD1 is the seventh-largest stablecoin by market cap, commanding approximately $2.2 billion. It is crucial to note that any major changes in these protocols can alter their rating. Therefore, an analytical and forward-looking view of these platforms is crucial. For now, the jury is out on these highly transformative, innovative protocol solutions until they demonstrate a significantly robust and transparent framework.