DeFi Savings Protocol Sky Reports $5M Loss in Q1 as ‘Savings Rate’ Diminishes Profits
DeFi savings protocol Sky reported a first-quarter loss of $5 million, attributed to a significant increase in interest payments to token holders, which more than doubled. This marks a notable change from the previous quarter, where Sky, formerly known as MakerDAO, boasted a $31 million profit. The 102% rise in interest payments stems from the shift to promote the use of the newer Sky dollar stablecoin (USDS) over the existing DAI. “The Sky Savings Rate was kept very high at 12.5% relative to the rest of the market, driving massive inflows,” said Rune Christensen, co-founder of Sky, in a Telegram message.
As rates were lowered to 4.5% in February, many investors chose to stay, according to Christensen. This situation presents a dilemma for the protocol, which was among the earliest decentralized finance applications on Ethereum back in 2017.
Sky operates similarly to a traditional bank, needing to lend at higher rates than it pays to savers. However, offering elevated rates on USDS without corresponding demand affects profitability, noted PaperImperium, a governance liaison at blockchain research and development firm GFX Labs. “USDS is a major drag on earnings,” he stated. “DAI makes money, but USDS does not.”
The focus on USDS is part of Sky’s Endgame initiative, led by Christensen. This plan aims to evolve the protocol into a more decentralized and resilient entity.
When Sky rebranded from MakerDAO and introduced USDS in August as part of Endgame, the expectation was that the new stablecoin would draw a different user base than DAI. USDS was intended to align better with regulatory and financial reporting requirements, targeting sophisticated investors like hedge funds and family offices exploring decentralized finance.
However, it remains uncertain whether USDS has effectively attracted a significant number of new users. The yields are different; USDS pays out 4.5%, while DAI yields 2.75%. Many investors converted their DAI to USDS, resulting in Sky needing to pay out more to those who were previously content with lower yields or no yields at all, according to PaperImperium.
The report also indicated that the combined supply of USDS and DAI has increased by 57% since the beginning of the quarter. A considerable portion of this increase is attributed to Ethena, the synthetic dollar protocol, which has invested over $450 million into staked USDS and transmits the yield to those who stake its own stablecoin, USDe.
Recently, Ethena shifted some of its reserves from USDS to USDtb, a stablecoin backed by BlackRock’s USD Institutional Digital Liquidity Fund, or BUIDL. This transition reduces the circulating amount of USDS, but it might also alleviate some of the interest liabilities for Sky.
