S&P Global Assigns Sky Protocol 'B-' Rating; Outlook Stable

At the beginning of August, S&P Global Ratings assigned its 'B-' issuer credit rating to Sky Protocol. The outlook is stable. Subsequently, S&P Global Ratings hosted webinar titled "Understanding Our Credit Approach to Sky," which detailed the methodology and rationale for assigning an inaugural credit rating to the decentralized lending protocol.

S&P's Broader Engagement in the Digital Asset Space

Before delving into the specifics of the Sky rating, context on S&P's broader activities within the digital asset ecosystem was provided. The Sky rating is not to be seen as an isolated event but part of a wider, ongoing effort to develop analytical frameworks for this emerging asset class.

Key initiatives highlighted include:

1. Stablecoin Stability Assessments: For the past 18 months, S&P has been publishing public assessments that rank major stablecoins against each other based on the risk of them losing their peg. These assessments focus on a relative comparison of stability rather than absolute creditworthiness.
2. Digital Bond Ratings: The agency has also been rating digital bonds—traditional debt instruments issued on blockchain technology by established issuers. This includes bonds on both private and public blockchains.
3. Tokenized Fund Ratings: More recently, S&P began rating tokenized funds. This surfaced a "full circle" moment where one of the tokenized funds S&P had previously rated appeared as an asset within the Sky Protocol's balance sheet, demonstrating the growing interconnectedness of the DeFi ecosystem.

These efforts underscore S&P's commitment to applying rigorous, structured analysis to various facets of the digital asset market, with the Sky credit rating being the latest and arguably most complex undertaking.

Understanding Sky: A Decentralized Protocol, Not a Company

Sky is not a legal entity in the traditional sense. It has no headquarters, no board of directors, and no corporate registration in a specific jurisdiction.

Instead, Sky is a decentralized autonomous organization (DAO) whose operations are governed by a set of smart contracts deployed on the Ethereum blockchain. Its primary function is to operate as a decentralized lending protocol that issues a stablecoin called USDS (which evolved from the well-known DAI stablecoin). USDS is the third-largest stablecoin by market capitalization, after Tether (USDT) and USD Coin (USDC).

The creation of USDS occurs through two main mechanisms:

1. Collateralized Lending: A user deposits crypto assets, predominantly Ether (ETH), into a smart contract vault and borrows USDS against this collateral. The protocol has specific collateralization requirements and limits to ensure that the value of the collateral significantly exceeds the value of the loan, creating a buffer against price volatility.
2. Peg Stability Module (PSM): Users can also create USDS by depositing other, more centralized stablecoins like USDC into the PSM, which then mints an equivalent amount of USDS on a one-to-one basis. This module is a key tool for maintaining the stablecoin's peg to the US dollar.

Once created, the borrowed USDS enters circulation. Borrowers can use it to acquire other assets or pay for services. Holders of USDS can also deposit it back into the protocol's savings contract (sUSDS) to earn a yield, which is generated from the stability fees (interest) paid by borrowers.

While the protocol itself is a decentralized network of code, it does interact with the traditional legal world by establishing legal entities in jurisdictions like the Cayman Islands. These entities are used for specific purposes, such as holding the "real-world assets" (RWAs) that are increasingly becoming part of the protocol's collateral base.