DeFi protocol Sky is as investible as Congolese debt, S&P Global Ratings says

According to one of the world’s most prominent ratings agencies, the $7.9 billion DeFi stalwart Sky is about as precarious as Congolese debt.

S&P Global Ratings gave the DeFi lender a B- credit rating on Thursday, putting the protocol’s USDS and DAI stablecoins on par with government bonds from the Democratic Republic of the Congo.

Assets of this rating are considered speculative grade investments, meaning the entities that issue them have the capacity to meet financial commitments, but are vulnerable to adverse business conditions.

“As a longtime Maker watcher, and often critic, I am absolutely shocked by this S&P Global rating for Maker-Sky,” PaperImperium, a governance liaison for DAO services firm GFX Labs, said on X. “B- is deep in junk territory, implying S&P assigns a greater than 12% chance of default within 3 years.”

Aside from the Democratic Republic of the Congo, debt from over a dozen other nations, including Pakistan, Nigeria, Egypt, and El Salvador, also received a B- rating from S&P Global.

Agency analysts gave Sky a stable outlook, but noted that a high concentration of depositors, a high reliance on the protocol’s co-founder, Rune Christensen, and the uncertainty surrounding DeFi protocol regulation all factored into the rating.

“These are only partly offset by the protocol’s good track record of limited credit losses since 2020, and modest earnings,” S&P Global’s report said.

Christensen told DL News the rating was based on data that has already improved since it was collected.

“It was done to kick off the process of interacting with traditional financial institutions, and will be a continuous process where the rating can increase as tradfi rating agencies learn more about DeFi and Sky,” he said.

First DeFi rating

It’s the first time a DeFi protocol has received a credit rating from the agency, which typically evaluates stocks, bonds, and commodities.

Sky, formerly MakerDAO, is a decentralised lending protocol on Ethereum that issues the USDS and DAI stablecoins to borrowers when they deposit collateral, typically other cryptocurrencies.

The protocol also allows users to deposit USDS and DAI into savings vaults to earn a yield, similar to how a bank offers interest on deposits.

It’s the fourth biggest stablecoin issuer with $7.9 billion worth of USDS and DAI in circulation.

S&P Global’s rating assesses the creditworthiness of Sky’s liabilities, namely the USDS and DAI stablecoins and their corresponding sUSDS and sDAI savings tokens.

It does not address the value of the SKY governance token or other ecosystem tokens such as srUSDS and yUSDS, the agency said.

A milestone?

The B- rating is low compared to established financial institutions. Some DeFi proponents say the fact that S&P Global evaluated Sky in the first place is significant.

“This rating is a milestone for all DeFi because it proves that decentralised protocols can meet the standards of major ratings agencies,” Hasu, a pseudonymous analyst at Steakhouse Financial, a DeFi advisory firm that works closely with Sky, said on X.

Hasu said the rating was “very fair” and warned of people “getting hung up on the B- because it’s not investment-grade.”

Elsewhere in the industry, S&P Global also upgraded Bitcoin treasury company Strategy rating from CCC+ to B- in July last year.

Compound Prime LLC, a California-based firm launched in 2021 by the same firm that’s behind the Compound DeFi lending protocol, also received a B- rating from S&P Global in 2022.

Risks

S&P Global noted several risks in its ratings report.

Sky is exposed to “low-probability, high-severity cyber risks” from the use of smart contracts. However, this risk was somewhat mitigated by Sky’s audits, bug bounty programmes and the protocol’s good track record of avoiding security breaches, the agency said.

The ratings report also noted that Sky’s governance remains highly centralised, as co-founder Christensen controls 9% of all governance tokens.

“Low voter turnout during key governance decisions means that he effectively controls Sky and is instrumental in pushing key governance decisions,” the report said.

The absence of a regulatory framework for decentralised protocols that issue stablecoins, like Sky, creates some uncertainty for their business models, the agency said.

Other risks include Sky’s $950 million exposure to Ethena’s USDe dollar-pegged token, and the small number of large depositors, both of which increase the protocol’s risk of default.

S&P Global said it is unlikely to upgrade Sky’s credit rating in the next 12 months, but could raise the protocol’s rating in the future if its governance becomes more decentralised and it implements a mechanism to prevent excessive depositor concentration.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.