Sky Protocol Faces Financial Setback Amid Interest Rate Surge
Although the DeFi savings protocol Sky, previously known as MakerDAO, experienced a significant downturn in the first quarter, it is indicative of broader challenges within the decentralized finance sector. The protocol reported a loss of $5 million, contrasting sharply with the $31 million profit it achieved in the preceding quarter. This financial decline is largely attributed to a strategic decision to incentivize the adoption of the new stablecoin, USDS, over its older counterpart, DAI, resulting in a 102% increase in interest payments to depositors.
Interest Payments Soar as USDS Struggles to Attract Users
According to a report from Steakhouse Financial, the financial dynamics within Sky have shifted dramatically, primarily due to the elevated interest payments to token holders. Co-founder Rune Christensen noted that while Sky’s savings rate remained high at 12.5%, which drew considerable inflows, the decision to boost interest payments has compromised the protocol’s profitability. A notable drop to 4.5% in February did not deter many investors from remaining with the platform, but the balance between attracting new users and maintaining profitability has become increasingly complex.
Challenges in Balancing Interest Rates and Demand
Sky’s operations resemble traditional banking, necessitating that it lend out funds at rates exceeding what it pays to depositors. However, the protocol’s strategy of offering higher interest rates without a proportional increase in demand for USDS has been detrimental, according to Paper Imperium from GFX Labs. The dual performance of USDS and DAI highlights the financial strain; while DAI continues to generate revenue, USDS appears to be a liability.
USDS Launch Aims for Institutional Appeal
The introduction of USDS was part of Sky’s “endgame plan,” aimed at rebranding and evolving the protocol into a more decentralized and robust entity. Launched in August, USDS was intended to attract a different demographic, specifically sophisticated institutional investors such as hedge funds and family offices, by enhancing regulatory compliance and financial reporting. However, the success of this initiative in drawing new users remains uncertain.
Investor Yields and Market Dynamics
Investors encounter varied returns with USDS offering a 4.5% yield, while DAI provides a lower return of 2.75%. The shift from DAI to USDS has necessitated higher payouts to users who were previously satisfied with minimal yields. Despite a reported 57% increase in the total supply of USDS and DAI since the quarter began, much of this growth was propelled by the synthetic dollar protocol Ethena, which has committed over $450 million in staked USDS. Recently, Ethena has begun reallocating some of its reserves from USDS to USDtb, a stablecoin supported by BlackRock’s USD Institutional Digital Liquidity Fund. This transition may lead to a decrease in circulating USDS, which could ultimately ease the financial burden on Sky by lowering interest obligations.
