For the first time, a major credit agency, S&P Global Ratings, has issued a credit rating for a decentralized finance (DeFi) platform. Sky Protocol, previously known as Maker Protocol, received a “B-” issuer credit rating from the agency.
The assessment is part of S&P’s ongoing analysis of stablecoin issuers. This initiative, which began in 2023, aims to evaluate how well these platforms maintain the stability of their value in relation to traditional fiat currencies. The review encompasses the creditworthiness of Sky’s obligations, specifically the USDS (USDS) and DAI (DAI) stablecoins, as well as the sUSDS and sDAI savings tokens.
Sky Protocol was evaluated on the ability of its USDS stablecoin to maintain its peg to the US dollar. The protocol received a rating of “4,” indicating a “constrained” ability. The rating scale ranges from “1” (very strong) to “5” (weak).
Sky Protocol operates as a decentralized lending platform, allowing users to obtain loans secured by cryptocurrency. Its USDS stablecoin plays a vital role in facilitating these lending and borrowing transactions. According to CoinMarketCap, USDS is currently the fourth-largest stablecoin by market capitalization, holding approximately $5.36 billion at the time of this report.
S&P highlighted potential risks that could lead to a default. These include depositor withdrawals exceeding the available liquidity within the peg stability module, as well as credit losses that surpass the protocol’s existing capital reserves.
Key Concerns: Governance, Capitalization, and Regulatory Landscape
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The S&P rating also identified vulnerabilities within the Sky Protocol, including a high concentration of depositors, a centralized governance structure, reliance on its founder, regulatory uncertainty, and a relatively weak capitalization level. These risks were partially mitigated by the protocol’s history of minimal credit losses and consistent earnings since 2020.
Andrew O’Neil, the digital assets analytical lead at S&P Global, commented that the “B-” rating signifies the agency’s belief that Sky Protocol is currently capable of meeting its financial obligations. However, the protocol would be vulnerable to adverse changes in business conditions, financial markets, and the overall economy.
The Sky Ecosystem Asset-Liability Committee stated that the rating process allowed them to analyze both standard counterparty risks and vulnerabilities unique to DeFi, such as smart contract vulnerabilities, oracle risks, bridge exploits, and governance-related challenges.
The Committee added that the information shared during the evaluation enabled them to reassess certain analytical assumptions about counterparty risks, which are common in traditional finance but may not directly apply to on-chain operations. They also carefully scrutinized novel DeFi-specific risks and emphasized the need for diligent monitoring and mitigation.
Sky co-founder Rune Christensen holds roughly 9% of governance tokens. S&P’s assessment emphasized that “the protocol’s governance process remains highly centralized due to low voter turnout during key decisions.”
Sky’s capitalization also raised concerns. The assessment revealed a risk-adjusted capital ratio of 0.4% as of July 27, indicating a limited surplus reserve to absorb potential credit losses.
S&P also lowered the protocol’s anchor rating to “bb,” which is four levels below the US bank anchor of “bbb+,” citing regulatory uncertainties impacting the DeFi industry.
Increased Scrutiny for Stablecoin Issuers
As the cryptocurrency sector becomes increasingly integrated with established financial markets, more cryptocurrency-related entities are being incorporated into the formal credit rating system.
S&P Global launched its stablecoin stability assessment in December 2023. The assessment assigned Circle USDC (USDC) a rating of 2 (strong), while Tether (USDT) and USDS were both rated 4 (constrained).
O’Neil stated that Tether’s weaknesses were related to transparency, while USDS had a more complex asset base than USDC. He further highlighted that the relatively weak capital position of USDS contributed to its lower rating.
The first blockchain-based mortgage securitization to be rated by S&P Global was Figure Technology Solutions, a technology platform that operates a blockchain-based marketplace for financial products. In June, S&P Global awarded an “AAA” rating to Figure’s latest securitization of mortgage assets, which totaled $355 million.
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