Key Takeaways
- Moody’s gave Sky Protocol a B3 rating, its first for a stablecoin protocol.
- Sky had about $90M in equity against roughly $10B in managed assets in September.
- Moody’s says Sky could earn an upgrade if its capital ratio clears 2.5%.
Wall Street’s credit machinery has officially reached decentralized finance (DeFi). Moody’s assigned Sky Protocol a B3 long-term counterparty risk rating with a stable outlook, the agency’s first rating of a stablecoin protocol. Sky, formerly MakerDAO, oversees the dollar-pegged USDS and DAI.
The eye-catching part isn’t merely the rating. Moody’s report found roughly $90 million in tangible common equity sitting behind approximately $10 billion in tangible managed assets as of September, a capital position it called a “material credit weakness.”
A Familiar Rating System Meets DeFi
The credit rating agency Moody’s credited Sky with low historical credit losses, liquid assets, and solid profitability relative to its risk. Since 2020, the protocol has recorded about $15 million in cumulative losses, while roughly 45% to 50% of its assets consist of stablecoins and tokenized money market funds. Another roughly 25% sits in cryptocurrency-backed loans.
Except there’s a catch. Moody’s said Sky’s thin capitalization, confidence-sensitive stablecoin liabilities, and decentralized autonomous organization (DAO) structure weigh heavily on its credit profile. Sky also lacks audited financial statements, formal incorporation, employees, officers, and directors.
“The B3 CRR reflects Sky Protocol’s solid, though limited, operating history in decentralized finance, the relatively liquid nature of a material portion of its assets, low historical credit losses, and solid profitability relative to its asset risk,” the Moody’s rating states.
The credit rating firm added:
“These positives are counterbalanced by Sky Protocol’s very low capitalization, confidence-sensitive stablecoin liabilities, and the inherently elevated operational, governance, legal, and regulatory risks associated with its DAO structure, smart-contract infrastructure, and permissionless stablecoin model.”
The Capital Cushion Is the Rub
The DeFi project Sky’s governance objectives call for tangible common equity to reach $150 million over the medium term. If losses overwhelm available capital, then the protocol would mint and attempt to sell new governance tokens. If that backstop failed, then USDS and DAI could be written down.
Moody’s said an upgrade becomes possible if Sky’s capital ratio rises above 2.5% and stays there while profitability, liquidity, and asset risk remain steady. A drop below 0.5%, consecutive quarterly losses, or weaker liquidity could push the rating the other way.
“Sky Protocol’s CRR could be upgraded if capitalization (as measured by TCE to TMA) increases and we expect it to remain above 2.5%; while it continues to maintain current levels of profitability, liquidity, and asset risk; or should evidence develop of substantial incremental mitigants to operational, governance, legal, and regulatory risks,” Moody’s report details.
For fiat-pegged stablecoins and DeFi, the bigger curiosity is now on the table: Wall Street’s old credit yardstick has finally been placed against a DAO.
