S&P Global Ratings Assigns First-Ever Rating to Sky Protocol
S&P Global Ratings has given a “B-” issuer credit rating to Sky Protocol, previously recognized as Maker Protocol. This marks a significant milestone, as it is the first time a leading credit agency has evaluated a decentralized finance (DeFi) platform. The rating is part of S&P’s ongoing initiative that began in 2023 to assess stablecoin issuers and their capability to maintain stable values in comparison to fiat currencies. The evaluation focuses on the creditworthiness of Sky’s liabilities, which include the USDS (US Dollar Stablecoin) and DAI stablecoins, as well as the sUSDS and sDAI savings tokens.
Rating Highlights Stability and Risks
In its inaugural evaluation, Sky Protocol received a score of 4, categorized as “constrained,” indicating challenges in the USDS stablecoin’s ability to maintain its peg to the US dollar. The rating scale ranges from 1, indicating very strong stability, to 5, denoting weak performance. Sky Protocol operates as a decentralized lending platform, allowing users to secure loans backed by cryptocurrency. At the time of reporting, the USDS stablecoin holds the position of the fourth-largest stablecoin by market capitalization, valued at approximately $5.36 billion, according to CoinMarketCap.
Potential Default Triggers Identified
S&P identified several risks that could lead to a default situation, including scenarios where depositor withdrawals outpace the liquidity available within the peg stability module and instances where credit losses exceed the capital reserves. Key concerns highlighted include government intervention, capitalization issues, and regulatory uncertainties.
Weaknesses in Protocol and Governance
The S&P rating also underscored various vulnerabilities within the protocol, such as a high concentration of depositors, centralized governance, over-reliance on the founder, and regulatory ambiguities. However, these risks are somewhat mitigated by the protocol’s minimal credit losses and earnings recorded since 2020. Andrew O’Neil, who leads digital assets analysis at S&P Global, noted that the “B-” rating reflects the agency’s belief that while the protocol can meet current financial obligations, it remains susceptible to adverse conditions in business, finance, and the economy.
Examination of Risks in DeFi
The Sky Ecosystem Asset-Liability Committee expressed that the assessment process allowed for a thorough review of both traditional counterparty risks and specific vulnerabilities linked to DeFi, including issues related to smart contracts, oracles, bridges, and governance. They emphasized the importance of monitoring these novel risks closely and taking steps to mitigate them.
Concerns Over Centralized Governance and Capitalization
Sky co-founder Rune Christensen possesses nearly 9% of the governance tokens, and S&P’s analysis pointed out that the governance structure remains highly centralized, largely due to low turnout during decisive voting periods. Additionally, the capitalization of Sky Protocol raises concerns; as of July 27, it reported a risk-adjusted capital ratio of only 0.4%, indicating a limited buffer for covering potential credit losses.
Regulatory Uncertainty Impacts Ratings
S&P’s assessment also downgraded the protocol’s anchor rating to “bb,” which is four levels below the “bbb+” rating assigned to US banks, highlighting the ongoing regulatory uncertainties surrounding the DeFi sector.
Increased Scrutiny for Stablecoin Issuers
As the cryptocurrency sector continues to integrate with traditional financial systems, more crypto institutions are being subjected to formal credit ratings. S&P Global initiated its stablecoin stability assessment in December 2023. According to the findings, Circle’s USDC received a rating of 2 (strong), while both Tether (USDT) and USDS were rated 4 (constrained). O’Neil elaborated that Tether’s weaknesses are mainly related to transparency, whereas USDS presents a more complex asset structure compared to USDC, with its relatively weak capital position influencing its rating.
First Blockchain-Based Mortgage Securitization Rated
In a notable development, Figure Technology Solutions became the first blockchain-based mortgage securitization platform to receive a rating from S&P Global. In June, Figure’s latest mortgage asset securitization, valued at $355 million, earned an “AAA” rating from S&P Global.
