Sky protocol (Previously Maker DAO) is a legacy blockchain protocol known for the creation of the on-chain stable coin DAI through the use of over collateralized asset loans in a mechanism dubbed “Vaults”. In March of 2024 the protocol initiated their ‘endgame’ strategy comprised of 4 general phases including: The creation of NewStable & NewGovToken - now known as USDS & SKY - to make a more resilient & scalable ecosystem, SubDAO architecture, a NewChain, & the final phase of immutable governance. The over arching goal of the protocol as founder Rune Christensen mentioned
Sky’s Goal: Making the benefit of DeFi really simple, & then bringing it to the users so that any one can easily access the benefits.
The Maker DAO line: The DAO is a legacy system that has existed for almost as long as the Ethereum ecosystem itself. With the recent transition legacy collateral, infrastructure, & documentation still exists which blurs the line of where this analysis begins & ends. For the purposes of this analysis the document will only focus on the systems of Sky product offerings & governance system outlines in Sky.money & the Atlas respectively. However, the core technology & system still derives from the legacy Maker DAO initiative. Therefore reference to Maker Vaults, DAI, & other systems may be mentioned for explanatory purposes.
The Sky DAO line: Sky DAO is an all encompassing and vast system that offers a variety of products, is connected to a variety of sub-DAOs (Sparks), and a variety of processes outlined in the immutable governance document - the Atlas. For the purpose of time, this analysis focuses only on diving deep into a limited amount of key protocol products, “accounting” mechanisms & the governance system surrounding the protocol. Further limits to contents within the report will be outlined via a ‘Scope limitation’ though users must note that these may NOT cover all Scope limitations that exist in this report.
Stable coins are a core technology that have found product market fit among the global economy through new regulatory evolutions from legislation like the GENIUS act in an effort to “revolutionize” the payment system. Sky offers an on-chain version of this technology by utilizing over collateralized loans in a vault mechanism. Users are able to lock up their assets in order to borrow USDS - the sky protocol stable coin - against their assets. The risk being the underlying collateral can be at risk of liquidation due to adverse market conditions.
Vaults - Sky Vaults allow users to deposit collateral & borrow stable coins like DAI (Legacy) & USDS against deposits. The Maker DAO mechanism allowed for various collateral types to be used to create a vault which had varying collateralization requirements & liquidation levels. Staking SKY has other benefits/potentials which will be explored further in this and other reports. The background process follows this flow:
Step 1: Create and Collateralize a Vault - User creates a vault and funds the vault with assets to borrow against
Step 2: Generate USDS against Collateralized Vault - The vault owner can initiate a transaction to borrow USDS (Stable coins) against their collateral
Step 3: Pay Down the Debt and Stability Fee - To get back the collateral asset the vault owner must pay back the USDS plus a Stability Fee.
Stability Fee - The fee take for providing the vault service. The stability fee continuously accrues on the USDS outstanding (borrowed). The annualized stability fee is variable based on collateral, for SKY token vaults at time of writing the stability fee is 20%.
The Stability Fee is a variable determined by Sky governance
Vault Liquidation Risk - To ensure Sky protocol always has enough collateral to cover the value of all borrowed USDS & DAI any vault deemed too risky is liquidated through a mechanism known as Auctions.
The protocol makes the determination by comparing a Liquidation Ratio to the current collateral-to-debt ratio of the vault.
Liquidation Ratio - this is the collateral-to-debt ratio threshold that will liquidate a vault. Liquidation ratios vary by collateral type the current SKY token liquidation ratio sits at 125%. Meaning if a vault only has $1.25 of SKY for every $1 of USDS in a vault, the vault will be liquidated.
The Liquidation Ratio is a variable determined by Sky governance