A credit rating of "B-" from S&P Global for Sky… the first of its kind for a DeFi protocol.
The credit rating granted by S&P Global to Sky Protocol reflects major concerns about governance centralization, weak capital, and regulatory uncertainty.
S&P Global Ratings grants a credit rating of "B-" to Sky Protocol in a first-of-its-kind precedent for a decentralized finance (DeFi) protocol.
The protocol, formerly known as Maker Protocol, received this rating as part of the agency's ongoing assessments of stablecoin issuers, a review initiated in 2023 to measure their ability to maintain value stability against fiat currencies.
The assessment includes the creditworthiness of Sky Protocol's obligations from USDS and DAI stablecoins, in addition to savings tokens sUSDS.
In its first assessment, Sky received a rating of 4 (restricted) regarding USDS's ability to maintain its peg to the US dollar, on a scale ranging from 1 (very strong) to 5 (weak).
Sky is a decentralized lending protocol that enables users to obtain loans collateralized by cryptocurrencies, with USDS used to facilitate lending and borrowing transactions. The currency ranks fourth globally among stablecoins by market capitalization, at approximately $5.36 billion at the time of writing, according to CoinMarketCap.
S&P identified key risks that could lead to default, including deposit withdrawals exceeding available liquidity in the stabilization unit, or credit losses exceeding available capital.
Governance, capital, and regulatory risks.
The report pointed out vulnerabilities in the protocol, including deposit concentration, centralized governance, reliance on the founder, regulatory ambiguity, and weak capital. These risks are partially offset by reduced credit losses and realized profits since 2020.
Andrew O'Neill, Head of Digital Asset Analysis at S&P Global, told Cointelegraph:
"A B- rating means we see the protocol as currently capable of meeting its financial obligations, but it will be at risk under negative business, financial, or economic conditions."
The assets and liabilities committee of the Sky system clarified that the assessment process allowed them to review traditional risks associated with counterparties, in addition to unique DeFi risks such as smart contracts, oracles, bridges, and protocol governance.
Co-founder Ron Christensen holds approximately 9% of the governance tokens, and S&P noted that "the governance process of the protocol remains highly centralized due to low voter turnout on important decisions."
The report added that the protocol's capital is a concern, as the risk-adjusted capital rate was only 0.4% as of July 27, meaning it has limited reserves to cover potential credit losses.
S&P also downgraded the protocol's core rating to "bb," which is four notches lower than the core rating of US banks "bbb+," due to regulatory uncertainty in the DeFi sector.