Sky Protocol Experiences Significant Financial Loss Amidst Changes
Although the decentralized finance (DeFi) savings platform Sky, formerly known as MakerDAO, reported a loss of $5 million in the first quarter of 2025, this marks a drastic shift from the $31 million profit it earned in the previous quarter. This downturn is primarily attributed to a substantial increase in interest payments, which surged by 102%, aimed at promoting the use of the newly introduced stablecoin, USDS, over the established DAI.
High Interest Rates Challenge Profitability
Sky’s latest financial report, shared by Steakhouse Financial, highlights the drastic change in its financial health. The platform’s substantial increase in interest obligations to token holders has contributed to its financial struggles. In contrast, in the preceding quarter, Sky enjoyed a profitable run, showcasing its ability to attract investments effectively. The rise in interest payments was a strategic move to encourage users to adopt the newer USDS stablecoin.
Balancing Savings Rates and User Retention
Despite maintaining a competitive savings rate of 12.5%, which is notably higher than many offerings in the market, Sky’s co-founder Rune Christensen noted that many investors chose to remain even after a reduction in the rate to 4.5% in February. This presents a complex scenario for the protocol, which has been a pioneer in the DeFi landscape since its inception on Ethereum in 2017. Operating similarly to a conventional bank, Sky must lend at higher rates than it offers to depositors. However, the current strategy of providing elevated interest rates without a proportional rise in the demand for USDS is hindering the platform’s profitability, according to Paper Imperium, a governance liaison at GFX Labs.
Strategic Push for USDS and User Base Expansion
The initiative to promote USDS is part of Sky’s broader “endgame plan” spearheaded by Christensen, which aims to create a more decentralized and robust ecosystem. Following the rebranding from MakerDAO and the launch of USDS in August, the intention was for the new stablecoin to appeal to a different demographic than DAI. USDS is crafted to align more closely with regulatory standards, aiming to attract institutional players such as hedge funds and family offices interested in decentralized finance.
Mixed Results in User Adoption
Despite the intention to draw in sophisticated investors, it remains uncertain whether USDS has significantly broadened Sky’s user base. The returns for investors diverge between USDS and DAI, with USDS offering a yield of 4.5%, while DAI provides a lower rate of 2.75%. Many investors have transitioned from DAI to USDS, compelling Sky to fulfill higher payment obligations to users who were previously satisfied with lower yields.
External Factors Influencing Growth
Recent reports indicate that while the total holdings of USDS and DAI increased by 57% since the start of the quarter, much of this growth can be attributed to Ethena, a synthetic dollar protocol that has invested over $450 million in staked USDS. Ethena has also begun to diversify its reserves, shifting some assets away from USDS to USDtb, a stablecoin linked to BlackRock’s USD Institutional Digital Liquidity Fund. This shift could lead to a decrease in the circulation of USDS, potentially alleviating some of the financial strain on Sky by reducing the interest it needs to pay to users.
