DeFi Protocol Sky Crashes $5M Into Red After USDS Interest Payments Devour Profits
Another ’stable’ coin story turns volatile—Sky’s algorithmic savings protocol just got a brutal reality check. USDS rewards flipped from asset to liability overnight, erasing gains with the efficiency of a Wall Street bonus clawback.
How it broke: The protocol’s much-hyped interest mechanism became its own worst enemy when USDS demand slumped. Instead of printing yield, it started burning reserves—turns out ’set-it-and-forget-it’ DeFi strategies work until they don’t.
Silver lining? At least it wasn’t a Terra-style collapse. Just your garden-variety nine-figure oopsie—another reminder that in crypto, ’risk-free yield’ is usually just risk hiding in plain sight.
No new demand?
When Sky rebranded from MakerDAO and launched USDS in August as part of Endgame, the plan was that the new stablecoin WOULD appeal to a different set of users than DAI.
USDS was designed to better comply with regulations and financial reporting requirements. It was targeted toward sophisticated investors like hedge funds, family offices and other institutions looking to dip their toes into decentralized finance.
But it’s unclear if USDS has been able to attract a substantial number of new users.
The returns investors can earn on USDS comapred to DAI is different: USDS pays out 4.5%, while DAI yields 2.75%.
Many investors swapped their DAI for USDS, meaning Sky had pay out more to people who previously were happy to earn a lower yield or, in many cases, no yield at all, PaperImperium said.
To be sure, the report said the combined supply of USDS and DAI has increased 57% since the start of the quarter. But a large part of this increase is from Ethena, the synthetic dollar protocol. It has piled over $450 million into staked USDS, and passes the yield on to those who stake its own stablecoin, USDe.
Over the past week, Ethena has switched some of its reserves from USDS to USDtb — a stablecoin backed by BlackRock’s USD Institutional Digital Liquidity Fund, or BUIDL.
The MOVE means there’s less USDS in circulation. But it may also benefit Sky by reducing the amount of interest the protocol must pay out.
