S&P Global Ratings Evaluates Sky Protocol
S&P Global Ratings has officially evaluated Sky Protocol, previously known as Maker Protocol, granting it a B- issuer credit rating. This marks a historic moment as it’s the first time a significant credit agency has offered a rating to a decentralized finance (DeFi) platform. The organization initiated its evaluation of stablecoin issuers in 2023, aiming to assess their capacity to uphold stable values against fiat currencies, including scrutiny of the debts associated with Sky’s stablecoins, USDS and DAI, as well as its savings tokens, sUSDS and sDAI.
Initial Assessment and Current Operations
In its initial assessment, Sky Protocol earned a score of “4”—indicating a “constrained” ability for USDS to maintain its peg to the US dollar, with the grading scale ranging from “1”, denoting very strong, to “5”, representing weak performance. Currently, Sky Protocol operates as a decentralized lending platform that allows users to secure cryptocurrency-backed loans. At the time of this report, the USDS stablecoin ranks fourth in market capitalization, valued at approximately $5.36 billion according to CoinMarketCap.
Risks and Vulnerabilities
S&P Global defines a default concerning the protocol’s obligations as a potential loss incurred by token holders. They have highlighted several risks that could lead to such a situation, notably circumstances where withdrawals by depositors exceed available liquidity in the peg stability module coupled with credit losses that exceed the available capital reserves. The agency’s analysis points to various vulnerabilities, including:
- High concentration of depositors
- Centralized governance structures
- Dependence on the founder
- Regulatory ambiguities
- Weak capital provisions
These concerns are somewhat alleviated by the protocol’s limited credit losses and consistent earnings recorded since 2020.
Expert Insights
Andrew O’Neil, who leads digital assets analytics at S&P Global, emphasized that a rating of “B-“ suggests the protocol can currently fulfill its financial commitments, although it remains susceptible to adverse economic, financial, and operational environments.
The assessment conducted by Sky’s Asset-Liability Committee allowed for an in-depth review of both traditional counterparty risks and unique DeFi vulnerabilities, such as those linked to smart contracts, oracles, and governance.
Governance and Capitalization Concerns
A notable factor in S&P’s evaluation is the concentrated governance, with co-founder Rune Christensen possessing nearly 9% of the governance tokens. The organization’s findings underscored that voter turnout for key governance decisions is low, contributing to a centralized decision-making process. Furthermore, the assessment highlighted concerns regarding Sky’s capitalization, revealing a risk-adjusted capital ratio of just 0.4% as of late July, which indicates a minimal buffer to address potential credit losses.
It is noteworthy that S&P has characterized the protocol’s anchor rating as “bb,” which is four levels below the “bbb+” rating associated with US banks, primarily due to uncertainties surrounding DeFi regulation.
Regulatory Landscape and Comparisons
As traditional financial markets increasingly intersect with the cryptocurrency landscape, regulatory scrutiny is intensifying for stablecoin issuers. S&P Global’s foray into stablecoin evaluations began in December 2023. Notably, Circle’s USDC received a commendable rating of 2, indicating strong stability. In comparison, both Tether and USDS were rated 4, reflecting constrained positions, with Tether’s shortcomings centered primarily on transparency issues, while USDS faces complexities pertaining to its asset composition and capital standing.
Just earlier this year, Figure Technology Solutions became the first blockchain-based mortgage securitization to be rated by S&P Global, achieving an impressive “AAA” rating for a $355 million portfolio of mortgage assets.
