S&P Assigns Sky Protocol Its First “B-” Credit Rating: Is the DeFi Protocol Unlikely to Enter Traditional Finance?

Global Authority Credit Rating Agency S&P Global Issues First Credit Rating for Sky Protocol

Recently, the global authority credit rating agency S&P Global conducted its first credit rating assessment for the decentralized finance (DeFi) protocol Sky Protocol (formerly Maker), resulting in a rating of only “B-“. This rating reveals the governance and liquidity risks associated with Sky, emphasizing that although the protocol is stable, its financial condition is quite vulnerable in adverse circumstances.

First Rating: S&P’s Experiment with Integrating DeFi into Traditional Systems

S&P Global Ratings has given Sky Protocol a “B-” rating, marking the first time a major institution has issued a rating for a DeFi platform. The USDS issued by Sky is currently the fourth largest stablecoin globally, with a market capitalization of approximately $5 billion. However, S&P’s assessment indicates that while the protocol has the capacity to meet its obligations, its robustness is significantly diminished in unfavorable economic or financial scenarios:

We limit our rating of Sky Protocol due to the high concentration of its depositors, the centralization of governance, and the relatively weak risk-adjusted capitalization.

Nevertheless, the agency also noted that Sky’s strong record of cryptocurrency-backed loan losses since 2020, moderate profitability, and ongoing efforts to reduce technical risks through smart contract audits and bug bounty programs somewhat offset these weaknesses.

According to S&P’s definition, a B rating signifies that the protocol is more susceptible to unfavorable business, financial, and economic conditions but still has the ability to meet its financial obligations.

Excessive Centralization in Governance: Low Voter Turnout Reveals Centralization Risks

The S&P report specifically pointed out the issue of governance centralization, highlighting that while Sky is theoretically a decentralized protocol, the extremely low voting participation allows co-founder Rune Christensen, who holds 9% of the governance tokens, and governance facilitators to wield disproportionate influence.

DeFi researcher @ImperiumPaper revealed in the meeting notes explaining S&P’s rating that while the agency correctly described the governance structure, it underestimated Rune’s actual control, noting that Rune had previously borrowed $50 million from Maker, raising concerns about conflicts of interest.

Clearly, the centralization of governance not only undermines the foundational decentralization of the protocol but also raises doubts among traditional institutions regarding its long-term stability.

Liquidity and Insufficient Capital Buffers: Concealed Bad Debt Risks

Another key concern lies in the funding structure. S&P pointed out that Sky’s deposit sources are highly concentrated among a few large holders, making it susceptible to liquidity crises if these whales withdraw simultaneously. Furthermore, its risk-adjusted capital ratio is only 0.4%, compared to around 8% for traditional banks, indicating that the protocol’s surplus reserves are insufficient to absorb large-scale losses.

@ImperiumPaper suggests that S&P has been overly stringent in setting risk weights, mistakenly conflating various assets with different risk profiles, such as over-collateralized loans, USDe collateralized loans, and direct holdings of USDe. In particular, the weight assigned to USDe is excessively influenced by the Basel III accord.

S&P stated: “Currently, Sky has only $70 million in USDS surplus buffer, which has not been dynamically adjusted based on asset composition, far from sufficient to support its large asset pool.”

This concentration of deposits and capital structure has long been a sensitive and cautious area for traditional financial systems and is seen as a major factor contributing to Sky’s low rating.

Regulatory Uncertainty: How to Define Default?

In addition to governance and liquidity, regulatory uncertainty is another significant burden on Sky. S&P acknowledged in its report that the DeFi landscape remains ambiguous under regulatory frameworks, and any new policies could directly impact the protocol’s safety. @ImperiumPaper explains:

Although the “GENIUS” Act does not directly apply to Sky (a non-payment stablecoin), Sky could benefit indirectly from holding safer USDC reserves in the regulatory environment.

More controversial is the question of “what constitutes a default?” S&P responded in the meeting: “If holders of the stablecoin USDS experience a haircut, it can be considered a default.” In other words, S&P views the “issuance of stablecoins” as a financial obligation, and “frequent slight depegging of the stablecoin” has become a default event.

However, @ImperiumPaper questions that stablecoins should be viewed in terms of exchange rate fluctuations rather than depreciation defaults; otherwise, the entire DeFi system would struggle to attain higher credit ratings.

Can DeFi Access Traditional Finance? The Threshold Must Be Crossed First

S&P emphasized at the end of its report that it is unlikely to upgrade Sky’s rating within the next 12 months. To improve, Sky must significantly diversify its depositor structure, establish dynamic capital buffers, and implement substantial decentralized governance. Conversely, if liquidity becomes insufficient or it suffers significant losses, its rating could be further downgraded.

This rating case signifies the “first encounter” between traditional finance and DeFi. If DeFi seeks institutional recognition and hopes for future integration with traditional finance, it must confront the same stringent scrutiny faced by banks: gaps in depositor structure, capital buffers, and governance transparency must not exist.

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