S&P Global Ratings has assigned a B- issuer credit rating to Sky Protocol, formerly known as Maker Protocol, marking the first time a major credit rating agency has issued a rating for a decentralized finance (DeFi) platform.
The rating is part of S&P’s ongoing assessment of stablecoin issuers, which began in 2023 to evaluate their ability to maintain a stable value relative to fiat currencies. The review covers the creditworthiness of Sky’s liabilities, the USDS (USDS) and DAI (DAI) stablecoins and the sUSDS and sDAI savings tokens.
Sky Protocol, evaluated for the first time, received a “4” — labeled “constrained” — for USDS’s ability to maintain its peg to the US dollar. The scale runs from “1” for very strong to “5” for weak.
The Sky Protocol is a decentralized lending platform that enables users to borrow cryptocurrency-backed loans. Its USDS stablecoin, used to facilitate lending and borrowing transactions, is the fourth-largest by market cap, with roughly $5.36 billion at the time of writing, according to CoinMarketCap.
S&P defines a default on the protocol’s liabilities as “a haircut imposed on token holders.” It highlights key risks that could trigger such a default, including depositor withdrawals exceeding the liquidity available in the peg stability module and credit losses surpassing the available capital.
Government, capitalization and regulatory risk are main concerns
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The S&P rating pointed to weaknesses in the protocol, including high depositor concentration, centralized governance, reliance on the founder, regulatory uncertainty and weak capitalization. These risks are partly offset by the protocol’s minimal credit losses and earnings since 2020.
Andrew O’Neil, S&P Global’s digital assets analytical lead, told Cointelegraph, “A ‘B-‘ rating means that we believe the protocol currently can meet its financial obligations, but it would be vulnerable in adverse business, financial and economic conditions.”
The Sky Ecosystem Asset-Liability Committee said the process gave it a chance to examine both traditional counterparty risks and DeFi-specific vulnerabilities such as smart contract, oracle, bridge and governance risks.
“As part of the interviews and documentation we shared with S&P, we had the opportunity to revisit and challenge some of the analytical assumptions behind counterparty risks that are typical of TradFi but don’t necessarily apply on‑chain, and we also examined novel, DeFi‑native, risks – smart‑contract, oracle, bridge and governance risks – that must be monitored and mitigated carefully,” they told Cointelegraph.
Sky co-founder Rune Christensen holds nearly 9% of governance tokens. S&P’s assessment stated that “the protocol’s governance process remains highly centralized due to low voter turnout during key decisions.”
Sky’s capitalization is another primary concern. According to the assessment, with a risk-adjusted capital ratio of 0.4% as of July 27, the protocol has a limited surplus reserve buffer to cover potential credit losses.
Sky’s assets Source: S&P Global Ratings
S&P’s assessment also lowered the protocol’s anchor rating to “bb,” four notches below the US bank anchor of “bbb+,” citing regulatory uncertainty in the DeFi sector.
Stablecoin issuers under increased scrutiny
As cryptocurrency continues to deepen its engagement with traditional financial markets, more institutions within the crypto space are being brought into the formal credit rating system.
S&P Global launched its stablecoin stability assessment in December 2023. As per the report, Circle USDC (USDC) received a rating of 2 (strong), while Tether (USDT) and USDS ranked 4 (constrained).
“Tether’s weaknesses are more around transparency, whereas USDS has a more complex asset base compared to USDC. And indeed, the relatively weak capital position is also something that drives that relative ranking,” O’Neil said.
The first blockchain-based mortgage securitization to receive a rating from S&P Global was Figure Technology Solutions, a technology platform that powers a blockchain-based marketplace for financial products. In June, Figure’s latest securitization of mortgage assets, totaling $355 million, was awarded an “AAA” rating by S&P Global.
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