S&P Global has assigned a "B-" issuer credit rating to Sky Protocol (formerly Maker Protocol), marking the first time a major rating agency has issued a rating for a decentralized finance (DeFi) platform.
This rating is part of S&P's ongoing assessment of stablecoin issuers, which began in 2023, aimed at evaluating their ability to maintain stable value relative to fiat currencies. The review covers the creditworthiness of Sky's liabilities, including the USDS and DAI stablecoins, as well as the sUSDS and sDAI savings tokens.
Sky Protocol, which was assessed for the first time, received a score of 4 for its ability to maintain the USDS peg to the US dollar, marked as "restricted." The rating scale ranges from 1 (very strong) to 5 (weak).
Sky Protocol is a decentralized lending platform that allows users to borrow cryptocurrency against collateral. According to CoinMarketCap data, its USDS stablecoin, used to facilitate lending transactions, ranks fourth by market capitalization, approximately $5.36 billion at the time of writing.
S&P highlighted key risks that could trigger defaults, including depositors withdrawing more than the available liquidity in the pegged stable module and credit losses exceeding available capital.
The S&P rating pointed out weaknesses in the protocol, including high concentration of depositors, centralized governance, reliance on founders, regulatory uncertainty, and insufficient capitalization. These risks are partially offset by the protocol's minimal credit losses and earnings since 2020.
Andrew O'Neil, S&P Global's head of digital asset analysis, told Cointelegraph: "'B-' rating means we believe the protocol is currently able to meet its financial obligations, but it will face vulnerabilities under adverse business, financial, and economic conditions."
The Sky ecosystem's asset-liability committee stated that this process provided them with an opportunity to review traditional counterparty risks and DeFi-specific vulnerabilities, such as smart contracts, oracle, bridging, and governance risks.
"As part of the interviews and documents we shared with S&P, we had the opportunity to revisit and question some of the analytical assumptions behind typical but not necessarily applicable counterparty risks in traditional finance, and we also examined novel, DeFi-native risks—smart contracts, oracle, bridging, and governance risks—that must be carefully monitored and mitigated," they told Cointelegraph.
Sky co-founder Rune Christensen holds nearly 9% of the governance tokens. S&P's assessment noted that "due to low voter turnout during key decision-making periods, the governance process of the protocol remains highly centralized."
Sky's capitalization is another concern. According to the assessment, as of July 27, the risk-adjusted capital ratio was 0.4%, and the protocol's surplus reserve buffer is limited and insufficient to cover potential credit losses.
S&P's assessment also downgraded the protocol's anchor rating to "bb," four notches lower than the "bbb+" anchor rating of US banks, citing regulatory uncertainty in the DeFi space.
As cryptocurrencies continue to deepen their engagement with traditional financial markets, more institutions within the cryptocurrency sector are being incorporated into formal credit rating systems.
S&P Global launched a stablecoin stability assessment in December 2023. According to the report, Circle's USDC (USDC) received a score of 2 (strong), while Tether (USDT) and USDS both received scores of 4 (restricted).
"Tether's weaknesses are more about transparency, while USDS has a more complex asset base compared to USDC. Indeed, relatively weak capital conditions are also a factor driving this relative ranking," O'Neil said.
The first blockchain-based mortgage securitization to receive an S&P Global rating is Figure Technology Solutions, a technology platform powering a market for financial products based on blockchain. In June, Figure's latest mortgage asset securitization totaled $355 million and received an "AAA" rating from S&P Global.
Related: Paxos Resumes U.S. Bank License Application as Stablecoin Regulatory Rules Take Shape
Original article: “S&P Global Assigns 'B-' Credit Rating to Sky, First for DeFi Protocol”
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