DeFi Savings Platform Sky Suffers $5M Loss in Q1 as ‘Interest Rate’ Diminishes Gains

DeFi savings platform Sky reported a significant loss of $5 million in the first quarter, attributed to a doubling of interest payments to token holders, as detailed by contributors from Steakhouse Financial.

This loss marked a dramatic shift from the prior quarter, where Sky, previously known as MakerDAO, had seen a profit of $31 million. The sharp increase in interest payments stems from an initiative to promote the use of the newer Sky dollar stablecoin (USDS) instead of the existing DAI.

Sky’s co-founder Rune Christensen shared that the Sky Savings Rate was maintained at a competitive 12.5%, which attracted considerable capital. Despite interest rates being reduced to 4.5% in February, he noted that many investors remained.

This situation presents challenges for the protocol, which was one of the initial decentralized finance applications established on Ethereum back in 2017.

Sky functions analogously to a conventional bank, requiring it to generate loans at a higher interest rate than what it offers to savers.

However, the decision to provide elevated rates on USDS without a proportional demand increase for the stablecoin is negatively impacting the protocol’s profitability, according to PaperImperium, a governance liaison at GFX Labs.

He explained that USDS is adversely affecting earnings, whereas DAI contributes positively.

The emphasis on USDS aligns with Sky’s Endgame strategy, spearheaded by Christensen, which seeks to evolve the platform into a decentralized and robust system.

When Sky transitioned from MakerDAO and launched USDS last August, the intention was for the new stablecoin to attract a different demographic compared to DAI.

USDS was crafted to adhere more closely to regulatory and financial reporting standards, aiming at sophisticated investors such as hedge funds and institutional entities interested in decentralized finance.

However, it is uncertain whether USDS has effectively drawn in a significant new user base.

The returns for investors differ between USDS and DAI: USDS offers a 4.5% yield, while DAI provides only 2.75%.

Numerous investors have converted their DAI into USDS, prompting Sky to payout more to individuals who were previously content earning lower or even no returns.

Although a report indicated that the combined supply of USDS and DAI has surged by 57% since the quarter’s commencement, a significant portion of this growth is linked to Ethena, a synthetic dollar protocol, which has deposited over $450 million into staked USDS and relays the yield to stakers of its stablecoin, USDe.

In the past week, Ethena has begun transferring some of its USDS reserves to USDtb, a stablecoin associated with BlackRock’s USD Institutional Digital Liquidity Fund, which could minimize the circulating USDS and potentially lower the interest payments that Sky is obligated to distribute.