Sky

Sky Protocol: The DeFi Pioneer Reinventing Decentralized Stablecoins

Sky (SKY) operates as the rebranded successor to MakerDAO, one of decentralized finance's foundational protocols. The ecosystem centers on USDS (USDS), an overcollateralized stablecoin maintaining a soft peg to the U.S. dollar through surplus collateral and smart contract-governed mechanisms.

As of early 2026, USDS commands approximately $9.5 billion in market capitalization, making it the fourth-largest stablecoin globally and the largest decentralized alternative to fiat-backed tokens like Tether (USDT) and USD Coin (USDC). The protocol's total value locked exceeds $17 billion, placing it among DeFi's most capital-intensive platforms.

The SKY governance token trades around $0.06, with a circulating supply derived from the 1:24,000 conversion ratio applied to legacy Maker (MKR) tokens.

The protocol generates approximately $168 million in annualized operational profits, funding over $102 million in SKY token buybacks since February 2025.

Sky's significance extends beyond its market position. The protocol demonstrates that a crypto-native stablecoin can maintain its peg through market cycles without relying on centralized reserves or traditional banking relationships.

From Maker to Sky: A Decade of DeFi Evolution

MakerDAO emerged in 2014 when Danish entrepreneur Rune Christensen envisioned a permissionless credit system enabling users to borrow against cryptocurrency collateral.

Christensen, who studied biochemistry at the University of Copenhagen before pivoting to blockchain, recognized that cryptocurrency volatility prevented digital assets from functioning as stable mediums of exchange.

The original DAI (DAI) stablecoin launched on December 18, 2017, using Ethereum (ETH) as its sole collateral type. The system employed Collateralized Debt Positions—smart contracts requiring users to deposit more value than they borrowed—to maintain DAI's dollar peg through purely algorithmic means.

Venture capital validated the model when Andreessen Horowitz invested $15 million in September 2018, acquiring 6% of all MKR tokens. The protocol survived an 80% decline in Ethereum's price during its first year while maintaining DAI's peg—an early stress test that proved the collateralization model's resilience.

Multi-Collateral DAI arrived in November 2019, expanding accepted collateral beyond Ethereum to include tokenized assets. This evolution proved critical when "Black Thursday" struck in March 2020.

On August 27, 2024, MakerDAO formally transitioned to Sky as part of the "Endgame" strategy Christensen had proposed in late 2022. The rebrand introduced USDS and SKY as upgraded successors to DAI and MKR, though legacy tokens remain operational.

Smart Contracts and Surplus Collateral: How USDS Works

USDS functions as an ERC-20 token on Ethereum, minted when users deposit accepted collateral into Sky Vaults—smart contracts that lock assets as security for newly created stablecoins.

The collateralization mechanism requires users to maintain surplus value relative to their borrowed USDS. When collateral ratios fall below minimum thresholds, the protocol automatically liquidates positions through onchain auctions.

Accepted collateral includes volatile cryptocurrencies like ETH requiring higher collateralization ratios, stablecoins like USDC with lower requirements, and tokenized real-world assets including U.S. Treasury bills.

This diversification reduces protocol risk compared to single-collateral models.

Peg Stability Modules enable direct, predictable exchanges between USDS and other stablecoins at fixed rates. When USDS trades above $1, arbitrageurs can mint new USDS cheaply and sell at a premium.

The protocol implements crowd-tested smart contracts following EIP-1271, ERC-4626, and UUPS proxy standards. Cross-chain functionality operates through SkyLink, a bridge enabling permissionless USDS transfers across Ethereum, Arbitrum, Optimism, Polygon, Avalanche, and Solana.

SKY Tokenomics: Buybacks, Burns, and Governance Power

SKY derives from MKR at a 1:24,000 conversion ratio, designed to democratize governance participation by lowering per-token cost. As of September 2025, approximately 63% of MKR had converted to SKY, with escalating penalties incentivizing remaining holdouts.

Protocol revenue flows primarily from stability fees charged on Vault loans and interest earned on real-world asset allocations. The Sky Savings Rate distributes a portion of this revenue to USDS depositors, currently yielding approximately 4.5% annually.

The Smart Burn Engine executes systematic SKY buybacks using protocol surplus. Since February 2025, the mechanism has deployed over $102 million toward repurchases, removing approximately 5.5% of circulating supply.

Repurchased tokens are either burned or held in reserves, directly reducing available supply.

SKY holders participate in governance through the Sky Atlas ruleset, voting on parameters including collateral types, stability fees, savings rates, and ecosystem expansions. Staking SKY generates additional rewards while providing collateral for USDS borrowing.

The protocol maintains a price-to-fees ratio around 3.6x—low relative to traditional financial institutions—suggesting the market has not fully priced in the protocol's revenue generation capacity.

Where USDS Actually Gets Used

USDS functions primarily as a yield-bearing savings instrument rather than a transactional stablecoin. The token's velocity of 1 in 2025—far below USDT's 30 or USDC's 9—reflects its role as collateral and savings vehicle rather than payment medium.

Sky Savings holds over $4 billion in deposits, with sUSDS—the yield-bearing wrapper—distributed across approximately 4,656 wallets. Users deposit USDS to receive sUSDS, which automatically accrues protocol-generated yield without requiring active management.

Spark Protocol, the first "Sky Star" sub-DAO, operates as a DeFi lending platform with over $3 billion in TVL. The Spark Tokenization Grand Prix attracted proposals from 39 traditional finance firms including BlackRock and Janus Henderson, demonstrating institutional interest in tokenized asset integration.

PayPal launched a PYUSD Savings Vault on Spark in December 2025, anchoring PayPal USD (PYUSD) yields to the Sky Savings Rate. This integration targets $1 billion in PYUSD deposits, connecting mainstream fintech users with DeFi yield mechanisms.

Institutional adoption accelerates through Obex, an incubator backed by $37 million from Framework Ventures and LayerZero. The Sky DAO authorized up to $2.5 billion in USDS to fund Obex-incubated projects developing institutional-grade yield strategies backed by compute credits, energy assets, and fintech credit facilities.

Ratings, Risks, and the Decentralization Paradox

S&P Global assigned Sky Protocol a B- credit rating in August 2025—the first such rating for a DeFi protocol. The agency cited high depositor concentration, centralized governance, weak risk-adjusted capitalization at 0.4%, and regulatory uncertainty as constraining factors.

Governance concentration presents a structural concern. Founder Rune Christensen controls approximately 9% of governance tokens, but low voter turnout means he effectively controls key decisions.

The November 2024 vote to retain the Sky brand revealed that four large entities controlled 98% of voting power.

Christensen responded that the rating was based on data that has since improved, characterizing it as the start of an iterative process with traditional financial institutions.

Black Thursday in March 2020 exposed operational vulnerabilities when Ethereum network congestion prevented liquidation auctions from functioning properly. One user purchased approximately $8.3 million worth of ETH collateral for near-zero bids. The protocol absorbed $6.65 million in losses and minted new MKR to recapitalize, though affected Vault owners lost 100% of their collateral.

Protocol exposure to Ethena's USDe (USDe)—approximately $950 million—introduces counterparty risk to synthetic stablecoin mechanisms dependent on perpetual futures funding rates remaining positive.

The USDS freeze function—introduced to enable centralized intervention in cases of theft or error—contradicts the decentralization principles MakerDAO historically championed. This tension between regulatory accommodation and censorship resistance defines the protocol's current strategic positioning.

Regulatory frameworks remain uncertain. The GENIUS Act passed in mid-2025 provides clearer guidance for certain stablecoin types, though decentralized protocols like Sky may face different treatment than centralized alternatives.

Competing in the Stablecoin Wars

The stablecoin market reached $314 billion in 2025, with USDT and USDC controlling approximately 82% of market share. USDS holds roughly 3.5% market share—meaningful for a decentralized alternative but dwarfed by centralized incumbents.

DAI continues operating alongside USDS, with surprising demand resurgence in recent months. Combined USDS and DAI supply ended Q2 2025 essentially flat, suggesting the rebrand has not yet driven accelerated adoption.

Ethena's USDe emerged as a formidable competitor, reaching approximately $11 billion in market cap through yield-generation strategies that attract users seeking returns unavailable from traditional stablecoins. USDe's integration with major exchanges like Bybit and Binance provides distribution advantages Sky has not replicated.

New entrants including World Liberty Financial's USD1 and Hyperliquid's USDH challenge the stablecoin landscape by offering yield-sharing arrangements to distribution partners. Sky's competitive response emphasizes vertical integration through Stars rather than competing for transactional stablecoin market share.

What Determines Sky's Trajectory

Sky's continued relevance depends on successful execution of the Endgame roadmap, particularly the Star ecosystem's ability to generate sustainable yield and attract institutional capital.

The Obex incubator represents Sky's institutional strategy—developing regulated "Primes" that bridge DeFi with traditional finance while maintaining protocol-level decentralization. Success here could differentiate Sky from competitors focused purely on crypto-native use cases.

Governance decentralization remains essential for institutional comfort. S&P noted that ratings could improve if the protocol mitigates governance concentration and excessive depositor risk—structural changes that may require years to implement.

Cross-chain expansion through SkyLink and integrations on Solana addresses Ethereum's fee and throughput limitations. However, bridge security introduces additional attack surface that the protocol must manage without centralized intervention.

The regulatory environment will determine whether decentralized stablecoins can compete with GENIUS Act-compliant alternatives. Sky's flexibility outside U.S. regulations provides optionality but may limit domestic adoption.

Sky occupies a distinct niche: a battle-tested decentralized stablecoin protocol generating real revenue and returning it to token holders through buybacks. Whether that niche can expand into the next phase of crypto infrastructure—where traditional and decentralized finance converge—will define the protocol's long-term significance.