Defi Warnings Issued by S&P: Insights into their Credit Evaluation Framework

DefiWarnings Sound from S&P: Insight into Sky's Credit Evaluation by S&P

In a groundbreaking move, S&P Global Ratings has assigned a credit rating to Sky Protocol, the operator of the fourth-largest stablecoin in circulation, USDS. The rating, a speculative-grade "B-" with a Stable outlook, marks a significant step forward as a traditional credit agency formally recognises a decentralized protocol.

Sky Protocol's resilient liquidation engines and robust cybersecurity defenses, particularly during the 2022-23 downturn, have earned it a systemically important position in the market. However, the rating reflects S&P's view of the risk that USDS and its staked version, sUSDS, could break their peg or fail to honor redemptions.

DeFi Researcher Asher Aharonov's analysis of Sky Protocol's balance sheet reveals both resilience and fragility. Nearly a quarter of Sky Protocol's reserves are parked in USDC, while another $1 billion is in tokenized MMFs like BlackRock's BUIDL. Yet, the protocol's risk-adjusted capital ratio stands at just 0.4%, far below the expected 8-10% for banks, leaving Sky Protocol thinly capitalized.

Concentration risks are present in Sky Protocol, as a handful of large depositors could withdraw simultaneously, rapidly draining the Peg Stability Module and triggering liquidity stress. Surplus reserves for Sky Protocol are limited to $70 million. Reducing the current 11% allocation to USDe in favour of more capital-efficient assets like tokenized Treasuries or USDC could significantly ease the capital requirement for Sky Protocol.

The S&P assessment pillars for Sky Protocol include Capital Adequacy and Earnings, Liquidity and Funding, Asset Quality, Governance and Control, and Regulation and Legal Frameworks. The failed governance takeover attempt in February 2025 exposed control concentrations within Sky Protocol, with low voter participation leaving founders and whales in control. Advancing decentralization through the "Endgame" roadmap, experimenting with measures like minimum holding periods for voting rights, or adding safeguards against capture could help address these governance vulnerabilities.

Persistent regulatory uncertainty around decentralized stablecoin issuers limits institutional adoption and leaves Sky Protocol navigating an unclear legal path. The decision marks a turning point, potentially leading to similar scrutiny for other stablecoin issuers like Frax and Ethena. The backstop for Sky Protocol remains "Debt Auctions", which involves minting and dumping SKY tokens precisely when confidence would be lowest.

The DeFi protocol Sky Protocol is developed by the team behind Hemi Labs, a Bitcoin programmability network founded by Jeff Garzik. The protocol occupies a systemically important position in the market as the issuer of USDS, the fourth-largest stablecoin. The S&P "B-" rating for Sky Protocol signals a broader shift in how traditional finance engages with decentralized systems.