S&P Rates Sky Protocol B- Citing Governance Centralization and Weak Capitalization

S&P Global Ratings has issued a B- credit rating to Sky Protocol, marking the first time a major credit rating agency has evaluated a decentralized finance (DeFi) platform [1]. The rating highlights significant concerns over governance centralization, regulatory uncertainty, and weak capitalization [1]. The assessment comes amid growing interest in integrating DeFi into traditional financial frameworks and reflects S&P’s broader initiative to evaluate stablecoin issuers since late 2023 [1].

Sky Protocol, previously known as Maker Protocol, operates as a decentralized lending platform that issues USDS and DAI stablecoins. Its USDS stablecoin is the fourth-largest by market cap, valued at approximately $5.36 billion [1]. S&P assigned the stablecoin a “4” rating under its constrained scale, indicating limited ability to maintain its peg to the U.S. dollar [1]. The rating scale ranges from 1 (very strong) to 5 (weak) [1].

Governance centralization remains a primary concern. S&P noted that the protocol’s governance process is highly centralized, with low voter participation during key decisions. Additionally, Sky co-founder Rune Christensen controls nearly 9% of governance tokens, amplifying concerns about concentrated control [1]. The agency also pointed to the risk of regulatory changes, which could impact the protocol’s operations and stability [1].

Capitalization is another key area of concern. S&P observed that Sky’s risk-adjusted capital ratio stands at 0.4% as of July 27, leaving the protocol with limited reserves to absorb potential credit losses [1]. This weak capital position increases the vulnerability of the platform during economic or market stress [1].

S&P defines a default on the protocol’s liabilities as a haircut imposed on token holders. Risks that could trigger such a default include deposit withdrawals exceeding available liquidity in the peg stability module or credit losses surpassing available capital [1]. Despite these challenges, S&P noted that the protocol has experienced minimal credit losses and earnings since 2020, providing some resilience [1].

Andrew O’Neil, S&P Global’s digital assets analytical lead, explained that the B- rating indicates the protocol can meet its financial obligations under current conditions but is vulnerable to adverse changes [1]. The Sky Ecosystem Asset-Liability Committee noted the assessment provided an opportunity to evaluate both traditional counterparty risks and DeFi-specific threats, such as smart contract and governance risks [1].

S&P’s assessment also lowered the protocol’s anchor rating to “bb,” significantly below the U.S. bank anchor of “bbb+,” underscoring the heightened regulatory uncertainty in the DeFi sector [1]. The agency’s stablecoin ratings include a 2 (strong) for Circle’s USDC, and 4 (constrained) for Tether’s USDT and Sky’s USDS, with the latter's more complex asset base and weak capital position contributing to its lower ranking [1].

This evaluation represents a pivotal moment for DeFi, as traditional financial institutions and rating agencies increasingly engage with the space. S&P’s involvement signals the growing importance of formal credit ratings in assessing the stability and risk profiles of crypto-based financial platforms [1].

Source: [1] S&P Global Assigns B- Rating to Sky Protocol Amid Governance and Capitalization Concerns in DeFi Landscape (https://en.coinotag.com/sp-global-assigns-b-rating-to-sky-protocol-amid-governance-and-capitalization-concerns-in-defi-landscape/)