The decentralized finance (DeFi) savings protocol Sky recorded a $5 million loss in Q1 after interest payments to token holders more than doubled, according to a report by Steakhouse Financial. This marks a sharp reversal from the previous quarter, where Sky (formerly MakerDAO) posted a $31 million profit.
Key Factors Behind the Loss
- USDS Incentivization: The 102% surge in interest payments stems from Sky's strategy to promote its newer stablecoin, Sky Dollar (USDS), over the established DAI.
- High Savings Rate: The protocol initially offered a 12.5% yield on USDS—far above market averages—driving significant capital inflows. Even after reducing rates to 4.5% in February, many investors retained their holdings.
👉 Why stablecoin yields matter for DeFi investors
The Double-Edged Sword of USDS Adoption
Sky operates similarly to traditional banks: it must lend at higher rates than it pays depositors. However, the aggressive promotion of USDS without proportional demand growth has strained profitability.
"USDS is a major drag on revenue. DAI generates profit; USDS, not so much," noted PaperImperium, a governance contributor at GFX Labs.
Endgame Plan and USDS Strategy
The push for USDS is part of Sky’s Endgame initiative, led by co-founder Rune Christensen, aiming to decentralize the protocol further.
Did USDS Attract New Users?
Launched in August, USDS targets institutional investors (e.g., hedge funds, family offices) with enhanced regulatory compliance features. However:
- Yield Discrepancy: USDS offers 4.5% returns vs. DAI’s 2.75%, prompting existing DAI holders to switch rather than attracting new users.
- Supply Growth: Combined USDS/DAI supply rose 57% this quarter, partly due to Ethena’s synthetic dollar protocol depositing $450 million. Recent shifts to BlackRock-backed USDtb may reduce Sky’s interest burdens.
👉 How Endgame reshapes Sky’s future
FAQ: Sky’s Financial Shift
Q: Why did Sky’s profits turn into a loss?
A: Sky’s high USDS interest payments (12.5% initially) outpaced revenue from lending, despite stablecoin supply growth.
Q: What is the Endgame plan?
A: A multi-year effort to decentralize Sky’s governance and introduce compliant financial products like USDS.
Q: Will USDS replace DAI?
A: Unlikely—DAI remains profitable, while USDS adoption hinges on institutional demand yet to materialize fully.
Q: How does Ethena impact Sky?
A: Ethena’s large deposits inflated USDS supply, but its recent shift to USDtb could lower Sky’s interest obligations.
Outlook for Sky
The protocol faces balancing act: sustaining USDS adoption without eroding profitability. Christensen’s Endgame vision may require recalibration if institutional inflows lag expectations.
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