S&P Global Ratings just dropped a bombshell in the DeFi world, assigning a “B-” issuer credit rating to Sky Protocol, formerly Maker Protocol. This marks the first time a major agency has dared to issue a credit rating for a decentralized finance (DeFi) platform. It's not your usual day in the DeFi park, folks.
Sky Protocol, which is a decentralized lending platform (pretty cool, right?), uses the USDS and DAI stablecoins to fuel crypto-backed loans. At the time of writing, it holds the title of the fourth-largest stablecoin by market cap, with $5.36 billion, according to CoinMarketCap. But don't let that fool you into thinking it's smooth sailing; S&P's rating points out some concerning issues.
The Risks and Rewards of Sky Protocol’s Rating in the DeFi Landscape
While the platform received a “4” rating on its ability to keep the USDS stablecoin pegged to the US dollar (translation: it's a little rocky), it’s still holding its ground. The scale S&P uses goes from 1 (very strong) to 5 (weak). So, yeah, they’re not thrilled.
But why the low rating? Well, Sky Protocol’s got some weaknesses to deal with, such as high depositor concentration, centralized governance, and reliance on its founder. Oh, and let’s not forget the ever-looming threat of regulatory uncertainty and weak capitalization. Still, they’ve got some things going for them, like minimal credit losses and earnings since 2020, so it’s not all doom and gloom.
According to Andrew O’Neil, S&P’s lead for digital assets analysis, this "B-" rating means that the protocol can meet its financial obligations right now, but in a worst-case scenario (you know, when the economy crumbles), it could be in trouble.
Sky Protocol's governance is also a little...well, centralized. Rune Christensen, the co-founder, holds nearly 9% of the governance tokens, and during crucial decisions, voter turnout is low, like, really low. That's a red flag for any platform that promises decentralization.
Capitalization is another issue; Sky’s risk-adjusted capital ratio is a mere 0.4% as of July 27, so if anything goes wrong, it won’t have much of a cushion to fall back on.
What’s more, S&P dropped the protocol’s anchor rating to “bb,” which is four notches lower than the US bank anchor rating of “bbb+.” The cause? Regulatory uncertainty in the DeFi space, which is, well, still a bit of a wild west.
It’s no surprise that stablecoin issuers are under the microscope these days. As the crypto world continues to merge with traditional finance, expect more institutions to face the same scrutiny. For instance, Circle USDC got a solid “2” rating from S&P, while Tether and USDS found themselves sitting at a “4.”
So, can Sky Protocol weather the storm? Only time will tell. But right now, it’s treading carefully in the DeFi waters. And as we all know, those waters can get pretty choppy.
Tanya Petrusenko
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