How Does Sky Work?
Formerly MakerDAO, this is the protocol behind the USDS stablecoin (upgraded DAI), with $7.5B in deposits. You can earn ~6% savings yield on your USDS or borrow against crypto collateral. Its B- grade reflects years of battle-testing, weighed against new governance complexity and a controversial freeze function on USDS.
TVL
$5.2B
Sector
CDP
Risk Grade
B-
Value Grade
A-
Core Mechanisms
6.1.1
USDS: overcollateralized stablecoin minted from multi-collateral vaults (CDP model)
Core CDP mechanism inherited from MakerDAO. Users deposit collateral into vaults and mint USDS (upgraded DAI). Battle-tested since 2019 with Multi-Collateral DAI.
2.2.1
Sky Savings Rate (SSR): protocol-level savings yield for USDS holders, currently ~6% APY
Evolved from DAI Savings Rate. Governance-adjustable rate serves as monetary policy tool. SSR at $4B+ TVL is the primary revenue engine.
6.3.1
Dutch auction liquidation system (Clipper module / Liquidation 2.0)
Improved from the fixed-price model that failed during Black Thursday 2020. More efficient capital recovery during liquidation events.
Stablecoin/PSM
Peg Stability Module for USDS peg maintenance via direct 1:1 swaps with USDC
PSM allows 1:1 swapping between USDS and USDC. Maintains peg but creates dependency on Circle's centralized stablecoin reserves.
6.4.4
Oracle Security Module (OSM) with one-hour price feed delay and multi-source fallback
OSM introduces a one-hour delay on oracle price updates, giving governance time to react to oracle manipulation. Proven design pattern but adds latency risk during flash crashes.
5.1.1
SKY governance token with daily buybacks (~$250K/day) funded by protocol revenue
Migrated from MKR at 1:24,000 ratio. $102M annualized buyback program. Token-weighted governance with SubDAO delegation.
5.3.1
NovelSky Stars (SubDAOs) with specialized governance domains and independent mandates
Endgame roadmap introduces Stars (SubDAOs) with specialized mandates. Multi-year transition concluding in 2027. Unprecedented governance fragmentation at this scale.
Collateral/RWA
Tokenized real-world assets as vault collateral (US Treasuries, corporate credit)
RWA-backed collateral generating $35.7M revenue over 14 months. Introduces off-chain counterparty and legal jurisdiction risks.
Stablecoin/Freeze
NovelUSDS freeze function allowing address-level censorship for regulatory compliance
USDS has a freeze function that can blacklist addresses, a major departure from DAI's censorship-resistant design. Represents a novel centralization-for-compliance tradeoff.
8.1.3
SkyLink: cross-chain USDS deployment via native message-passing bridges
USDS is designed to move seamlessly across chains via SkyLink without traditional bridging. Reduces friction but introduces bridge dependency.
How the Pieces Interact
The freeze function makes USDS a censorship-capable asset. DeFi protocols using USDS as collateral face the risk of frozen positions, undermining the trustless property that makes stablecoins useful in DeFi.
Multi-Star governance fragments decision-making authority. During market crises, conflicting Star mandates could delay critical parameter updates (stability fees, liquidation ratios) by 48-72 hours, accumulating bad debt.
RWA defaults or legal challenges could impair a significant portion of reserves simultaneously, potentially triggering USDS undercollateralization. Off-chain assets cannot be liquidated on-chain.
The optional DAI-to-USDS migration creates a two-token system that splits liquidity, governance attention, and community alignment. Users choosing DAI for censorship resistance reduce USDS adoption.
Heavy PSM reliance on USDC creates dependency on Circle's centralized stablecoin. A USDC depeg (as seen in March 2023 SVB event) directly threatens the USDS peg.
What Could Go Wrong
- USDS freeze function introduces censorship risk that undermines decentralization, splitting the community between DAI purists and USDS adopters
- Endgame SubDAO (Stars) governance is untested under market stress and could gridlock critical parameter changes when speed is essential
- RWA collateral exposure introduces off-chain counterparty and legal jurisdiction risks to an on-chain protocol
USDS Freeze Function Censorship Cascade
ModerateTrigger: A major regulatory authority orders Sky to freeze USDS held by a large DeFi protocol or sanctioned entity, triggering a confidence crisis in USDS censorship resistance
- 1.Regulatory order forces Sky to activate USDS freeze function on addresses holding $100M+ in USDS — Frozen USDS balances become non-transferable, immediately demonstrating USDS is not censorship-resistant
- 2.DeFi protocols using USDS as collateral (Aave, Morpho, Spark) begin emergency delisting discussions — USDS utility as DeFi-native collateral collapses as protocols switch to DAI or USDC
- 3.Mass migration from USDS back to DAI via 1:1 conversion, draining USDS liquidity — Sky Savings Rate deposits decline sharply as users flee USDS for DAI, reducing protocol revenue
- 4.SKY token drops as protocol revenue from USDS-based stability fees collapses — Daily $250K SKY buyback program becomes unsustainable; governance token enters downward spiral
Risk Profile at a Glance
Overall: B- (30/100)
Lower score = safer