Sky Protocol: two engines, three rate worlds, and a reserve that is finally growing
Sky Protocol has five surplus quarters, a live Stage 2 buyback, and $82.40M of reserves growing at half of every month's surplus. What USDS earns at a 12%, 1% and unchanged Fed, and why the free float, not supply, decides the token.
The issuer of USDS has five surplus quarters behind it, a rebuilt buyback, and $82.40 million of reserves against an $11 billion book. What it earns from here depends less on how much USDS it issues than on which engine the Fed leaves running.
The headline and the number behind it
Sky Protocol, the issuer of USDS and the successor to MakerDAO, generated $107.35 million of gross protocol revenue in the second quarter of 2026, up 10.5 percent from a year earlier, and a net protocol surplus of $33.29 million, its fifth consecutive positive quarter [1]. It closed the quarter with $82.40 million of reserves standing behind $12.32 billion of protocol collateral [1]. That ratio, about two thirds of one percent, is the number that decides how the rest of this analysis reads.
The book has since shrunk and the reserve has not. Protocol collateral fell to $10.98 billion in July, and sUSDS, the savings token, fell from $5.52 billion to $4.33 billion in the same month [3]. A smaller balance sheet on the same capital is a better ratio, and the way it got smaller, a savings-rate cut followed by savings money leaving, is the whole argument of this piece in miniature.
The figures come from the Sky Frontier Foundation, an independent foundation that publishes the protocol's accounts from data at financial.skyeco.com, and they are unaudited [2]. DefiLlama tracks the same protocol on its own definitions and arrives at different totals; the two sets of books are reconciled in a table near the end.
A bank balance sheet, and which line is the equity
Sky is easiest to read as a bank. The assets are the collateral, in three legs: capital deployed through Sky Agents such as Spark and Grove into lending, credit and Treasury-bill strategies, USDC held in the peg stability module, and ETH, wBTC and stETH posted by borrowers in the crypto vaults [2][5]. Prime Agent vaults held $6.84 billion at the end of June and $5.63 billion at the end of July, about half the book [3]. The crypto vaults, once the entire business, are now the smallest leg. The liabilities are USDS and DAI outstanding, and USDS supply stood at $10.04 billion at the end of June, up 96.9 percent year on year [2].
The equity line needs saying out loud, because the protocol reports more than one candidate. This piece uses Sky Reserves, the on-chain solvency buffer that absorbs losses before anything else does, and nothing else. The foundation's dashboard also reports a wider capital position that includes the protocol's token holdings, with the GROVE position marked at market since July [3]. Those assets are illiquid and move with the protocol's own fortunes, the wrong property for loss-absorbing capital, so they are left out. Every ratio that follows runs off the $82.40 million.
The income statement, and where the costs really are
Gross protocol revenue is what the collateral earns plus the stability fees charged on crypto loans. Net protocol revenue is what remains after direct expenses, and it reached $40.09 million in the quarter, a 37.3 percent margin, with trailing twelve-month net protocol revenue of $159.63 million [1]. Those expenses, $67.26 million, the gap between the two lines, were mostly the savings yield: $53.91 million went to sUSDS holders in the quarter, roughly 80 percent of protocol expenses [3]; the remainder includes the revenue shares the Agents keep [5]. Net protocol surplus is what remains after a security and maintenance distribution of 20 percent of net revenue and operating costs [3]. The operating line has all but disappeared: operating expenses fell from $9.89 million in June 2025 to $161,000 in June 2026 after the foundation consolidated its operations [2]. The cost base is the savings rate. It is also the one line governance sets directly, which matters later.
Divide the surplus by the reserve and the return on equity is absurd. Annualising the second quarter gives roughly $133 million against $82.40 million, a book ROE in the region of 160 percent: about 1.1 percent return on assets, multiplied by about 150 times leverage. A large US bank earns a similar return on assets on a tenth of the leverage. Sky's ROE is a leverage artefact, and the leverage is a governance choice. S&P Global, which assigned Sky a B- issuer rating in August 2025, the first it had given a DeFi protocol, listed "weak risk-adjusted capitalization" among the constraints and said it could cut the rating if losses on crypto-backed loans exceeded the surplus reserve [6][7].
The reserve was thin because governance kept it that way. For years the buffer sat in the tens of millions and everything above it was swept into token buybacks, a programme that has deployed more than $120 million since February 2025 [2]. On March 14, 2026, Sky governance cut the buyback allocation from 75 percent of surplus to 7.5 percent to build a $150 million reserve [8]. Reserves reached $82.40 million at June 30, with $33.7 million of that accumulated since the March decision [1][2]. In August the protocol moved to the second stage of that plan: each month's surplus now goes up to 50 percent to the reserve, 22.5 percent to SKY buybacks that fund staking rewards, 22.5 percent to USDS rewards for stakers, and 5 percent to buy-and-burn [9]. Half of every month's surplus now stays in the building, the first time in the protocol's history that retained earnings have been designed to compound. At half of a roughly $10 million monthly surplus, the $150 million target is a 2027 event.
What the token is actually pricing
At $0.072, SKY carries a fully diluted valuation of about $1.7 billion on 23.4 billion tokens, nearly all of them circulating, with roughly $0.7 billion of the supply staked [4]. Against $82.40 million of reserves that is a price-to-book near 20 times. Against roughly $110 million of trailing net surplus it is a multiple of 13 to 15 times.
JPMorgan reported second-quarter net income of $21.2 billion, a 24 percent return on equity and a 29 percent return on tangible common equity, or 23 percent excluding a gain on Visa shares [10]. At about $355 a share the stock trades near 3.1 times its tangible book value of $113.35 and about 15 times trailing earnings [10][11]. Sky's ROE is nearly seven times JPMorgan's; the two earnings yields are close to identical at roughly 7 percent. On the reserve definition of book, the entire ROE gap is absorbed by the price-to-book difference, which is the market saying it already knows the equity denominator is a policy variable. Widen the definition to include token holdings and the multiple drops, but the point survives: the price is set off earnings, not off capital.
That fixes what SKY holders actually receive. A holder's long-run return equals the accounting ROE only if the token is bought at book value and retained earnings compound at that same rate. Sky fails both: a dollar retained into reserves earns nothing directly, it is insurance, and USDS supply nearly doubled over the past year with no equity retention at all. The record agrees. MKR converted to SKY at 24,000 to one, and MKR's all-time high of $6,292 on May 3, 2021 works out to about $0.26 per SKY [12]. The protocol's revenue that year was a fraction of today's. The token was worth more than three times as much. The multiple, not the earnings, did the work.
sUSDS is close to breakeven, and governance just said so
The single most useful fact about Sky's economics is that the savings token barely earns the protocol anything at current rates, and since July that is policy rather than inference. Sky announced on May 26 that governance had adjusted the savings rate to 3.60 percent to strengthen the surplus buffer [13]. On July 23 governance went further and cut the Sky Spread, the protocol's margin over its base rate, to zero, leaving a 0.2 percent distribution fee as the only gap between the savings rate and the base rate, and re-referenced the base rate to SOFR [3]. The live rate on the Sky.money interface is 3.52 percent [33]. Second-quarter gross revenue annualises to roughly $430 million on $12.3 billion of collateral, so the asset side yields around 3.5 percent. A dollar in sUSDS earns the protocol about that and costs about that. The spread on the savings float is zero by design.
The protocol still made a 37.3 percent net margin in the quarter because of the mix, not because every dollar of collateral clears its funding cost. The net interest income comes from the USDS that is not in sUSDS: tokens in wallets, in DEX pools, pledged as collateral, or held in the peg stability module. That float costs nothing and earns the full asset yield through the Agents and the PSM, the same structure that makes non-interest-bearing deposits the franchise of a commercial bank. It means "more USDS" is the wrong growth metric. More non-yield-bearing USDS is the right one. Our January note on stablecoin yield vaults described sUSDS from the depositor's side; this is the same product from the issuer's side.
Sagix
The past year shows the difference. USDS supply grew 96.9 percent and sUSDS grew 149 percent to $5.52 billion, while gross revenue grew 10.5 percent [1][2]. Supply doubled and earnings barely moved, because most of the new supply arrived with a savings rate attached. The quarter-on-quarter line is the cleaner tell: gross revenue fell 13.3 percent from the first quarter's $123.79 million as USDS supply eased from $11.70 billion to $10.04 billion [1][17]. Then the July fade, $1.19 billion out of sUSDS in one month after the rate was cut to the bone [3], with a partial recovery to $4.71 billion since [33]. The protocol has run this experiment in the other direction too: a 12.5 percent savings rate in December 2024 to attract deposits [14], cut to 8.75 percent in February 2025 and to 4.5 percent in March [15][16]. In the first quarter of 2025 DefiLlama records $72.7 million of savings cost against $113.7 million of gross revenue [4], and in the second quarter of 2025 distributions exceeded net revenue, leaving a remittance to reserves of negative $8.15 million [2]. Growth bought with the savings rate transfers the margin to depositors. Growth lost when the rate is cut was never really growth.
So the initiatives that matter are the ones that create USDS demand with no savings rate attached, and there are more of them than a quarter ago. Spark migrated more than $150 million into USDS/PYUSD and USDS/USDT pools on Uniswap v4 as a shared liquidity layer for stablecoin issuers, with USDS as the quoting asset [2][3]. The peg stability module's Uniswap hook, which swaps USDC for USDS at par, has processed about $550 million of volume [3]. Spark coordinates the capital behind Robinhood's Earn product for USDG, with USDS supplying the underlying liquidity [2]. The foundation's 2026 outlook calls for $611.5 million of gross revenue, $157.8 million of net surplus and $20.6 billion of USDS supply [8][17]. First-half gross revenue was $231.66 million and supply is $10 billion, so the top line is behind that plan even as the surplus, helped by the collapse in operating costs, runs close to it [2].
The product shelf: fixed, expert and curated
The shelf has grown since the spring, and it helps to know what each new item does to the issuer's economics rather than to the depositor's. Sky.money, the interface, is operated by Skybase International, itself an independent Sky Agent, and lists five ways to hold dollars [34]. Plain sUSDS accrues the governance-set savings rate, 3.52 percent today on $4.71 billion of supply [33]. Fixed Yield, launched in June with Pendle, wraps sUSDS into a Pendle v2 market whose principal token, PT-sUSDS, pays the rate fixed at entry if held to the November 26 maturity; the rate is market-set, 5.37 percent in late July and 4.77 percent now, and the product drew $44.1 million in its first month and $55.94 million by late July [2][3][35]. Since July PT-sUSDS can be posted as collateral on Morpho to borrow USDS [3]. stUSDS, the expert module, takes USDS and lends it to SKY stakers against their staked SKY: the supplier earns the SKY borrow rate on the utilised share, less an accessibility reward, and the plain savings rate on the idle share, for 5.38 percent today on $192 million of supply, with utilisation targeted at 90 percent and withdrawals dependent on unutilised liquidity [34]. Sky Vaults are curated stablecoin strategies run on Morpho vault contracts at market-set rates, and Sky Ecosystem Rewards pay USDS suppliers in partner tokens and points, GROVE among them [3][34].
Read from the issuer's side, the shelf sorts into three groups. Fixed Yield changes the shape of the savings float without changing its cost: the underlying is still the savings rate, so the protocol pays the same, but a deposit with a maturity date is stickier than one without, and the July fade is the argument for stickiness. stUSDS is the interesting one economically, because it is the crypto-lending engine in miniature with SKY itself as the collateral. It is the first product on the shelf that prices a slice of savings demand at a market rate rather than a governance rate, and the risk of a SKY drawdown is contained in the stUSDS pool by design rather than reaching sUSDS holders [34]. At under 2 percent of USDS supply it is a rounding error today, and it is also circular at the margin: the ultimate backstop for the protocol is SKY issuance, and stUSDS is a book of loans secured by SKY. The third group is the one that matters most for this piece. The GROVE reward programme holds about $186 million of USDS on which Grove pays the yield in its own token [3]. That is USDS the protocol earns the full asset yield on while someone else carries the cost of attracting it, the closest thing on the shelf to free float, and it is being manufactured by the same Agents whose tokens are the leakage risk discussed under the third scenario.
Scenario one: a 12 percent Fed
Sky is a floating-rate lender with a large zero-cost float, and that is the profile that survived the last time rates went there. The federal funds rate reached a record 20 percent in late 1980 under Paul Volcker [18]. The thrifts that failed over the following decade held long-term fixed-rate mortgages against short-term deposits whose rates were capped by regulation [19]. Sky holds Treasury-bill strategies and Agent deployments that reprice within weeks, charges stability fees that governance can reset by vote, and has already run a 12.5 percent savings rate [14].
The first-order effect is a windfall. At 12 percent the asset side of an $11 billion book earns something like $1.3 billion a year instead of $430 million. The savings rate has to follow, or sUSDS empties into tokenised bills, so the sUSDS leg is paid for. The free-float leg still costs nothing, and at 12 percent it is worth several hundred million dollars a year on its own.
The second-order effect trims that. Non-interest-bearing money runs to yield when yield is 12 percent: some of the float moves into sUSDS, where Sky keeps it but pays for it, and some leaves for bills. What stays is the USDS that is doing something. If half the free float leaves, net revenue is still a multiple of today's.
The third-order effect is where the scenario is decided, and it is not the one the protocol's history points to. In March 2020 a roughly 50 percent fall in ETH overwhelmed Maker's auctions, a single bidder won collateral for near-zero DAI, the system was left with more than $4 million of bad debt that had to be covered by minting and auctioning MKR [20][21], and DAI was still trading above the dollar two weeks later [22]. Today's book is Agents and PSM dollars, the crypto vaults are the smallest leg, and the peg stability module, which did not exist in 2020, absorbs repayment pressure by minting USDS against USDC at par. A crash still empties the crypto vaults, since nobody borrows at 13 to 15 percent against a falling asset, but the vaults are no longer where the balance sheet lives.
The live risk is the Agent credit book, which has not been through a credit cycle. Losses in an Agent's strategy are absorbed first by the Agent's own risk capital, then by Sky Reserves, and only then by recapitalisation through SKY issuance [23]. Of the $6.84 billion in Agent vaults at the end of June, about $2.58 billion sat with six named institutions, Janus Henderson, BlackRock, Anchorage, PayPal, Securitize and Galaxy [3]. What the other $4 billion holds, bills or credit, is the variable to watch, and Grove's new $500 million warehouse facility for Galaxy, secured by digital assets, is a reminder that the book is not all bills [3]. The other live risk is the float itself: at 12 percent, transactional USDS that does not need to be USDS becomes a T-bill.
The token in this scenario: earnings up three to four times, multiples down two to three times, since a 12 percent risk-free rate compresses every multiple. Roughly flat to double in a market where the major crypto assets are down 70 percent, unless bad debt exceeds reserves and the recapitalisation mechanism, minting SKY into a falling market, fires.
Scenario two: a 1 percent Fed
Then the two engines swap, and this is the only one of the three worlds in which the crypto engine matters again. Sky has always been two businesses stapled together: a bill-carry trade on free float that needs high rates, and a crypto-collateralised lender that needs low rates. 2021 was the second business. DefiLlama records about $84 million of Maker gross revenue that year, almost entirely stability fees, with savings costs of a few thousand dollars per quarter [4]. The past two years have been the first business.
At 1 percent the carry trade dies. Agent bill deployments yield about 1 percent, the free float earns almost nothing, and the sUSDS spread, already zero, has nowhere to go. Issuers that live purely on this engine suffer most; reserve income was $668 million of Circle's $701 million of second-quarter revenue [24]. Crypto leverage revives. Governance can set stability fees at 3 to 5 percent, still cheap for a leveraged position in a bull market, and borrowers pay for leverage, not for cost of funds. Crypto-backed debt can return to the scale of 2021, the DeFi-native float grows with on-chain activity, and the savings float gets cheap to retain: with bank deposits near zero and money funds at 1 percent, a 2 percent savings rate funded from stability fees looks generous.
Rough arithmetic: $6 billion to $8 billion of crypto vaults at 4 percent, plus $6 billion of Agent book at about 1.2 percent, less a 2 percent savings rate on $5 billion to $6 billion of sUSDS, lands net revenue around $200 million to $250 million, above today's $160 million. A 1 percent world with a crypto bull market is as good for Sky's income as the present one, with worse collateral and more cyclicality.
Two failure modes. The first is 1 percent without the bull: a deflationary bust in which crypto lending is dead and bills pay nothing, leaving net revenue of perhaps $50 million to $70 million, still positive now that operating costs are near zero, but thin. The second is subtler. With bills at 1 percent and a savings rate to fund, the pressure on Agents to reach into private credit for spread is the dynamic that produced the tokenised-credit defaults Maker absorbed in 2023 on pools onboarded during the low-rate years [25]. The amounts were small then. The Agent book is not small now.
The token would likely do better at 1 percent than at 12, even where the business is worse. At its 2021 peak MKR was valued at roughly $6 billion on just under a million tokens, against about $84 million of gross revenue for the year [4][12]; today SKY trades at about four times gross revenue [4]. Markets pay far more for a growing crypto lender than for a bill fund.
Scenario three: rates unchanged, which is the live case
Then neither engine runs hot and the whole thing comes down to distribution. At today's rates the bill carry is decent but a commodity: Tether, Circle and, from next year, a consortium of US banks all earn the same spread on the same collateral. JPMorgan, Citigroup, Bank of America, Wells Fargo and more than a dozen other banks announced a shared tokenised-deposit network operated by The Clearing House, targeting a first-half 2027 launch [26][27]. That network is built to keep deposits inside the banking system, which is a direct bid for the same non-interest-bearing float Sky needs.
The one-time gains are spent. Operating costs cannot fall further, and the spread cut means the savings float earns the protocol nothing until governance reverses it. Growth has to come from free float. Stablecoin supply has been growing quickly, peaking above $311 billion in January and sitting near $290 billion now [28][29]. If Sky holds its share and the free-float ratio does not deteriorate, net surplus compounds at perhaps 20 to 30 percent a year: 2026 near the plan, and something like $300 million to $450 million of annual surplus by 2030.
What is actually at risk in this world is not rates. It is regulation, margin discipline and leakage, in rising order of importance. Section 404 of the Senate text of the CLARITY Act, the Tillis-Alsobrooks compromise, bans stablecoin rewards that are economically or functionally equivalent to deposit interest and carves out rewards tied to bona fide activities including staking, liquidity provision and governance [30][31]. The Senate votes on cloture on the motion to proceed to H.R. 3633 on September 15, and invoking cloture takes 60 votes, so at least seven Democrats or independents if every Republican supports it [32]. At flat rates the savings rate is Sky's main distribution weapon, and a version of it restructured around the staking carve-out changes the economics. Margin discipline is whether the savings rate creeps back above the asset yield as it did in early 2025; the spread-to-zero decision says governance has chosen the other direction, for now.
Leakage is the structural one, and it deserves more weight than another rate path. GROVE went live on July 6 with a reward programme holding about $186 million of USDS, Spark already has SPK, and Grove now originates institutional loans for Galaxy through its own $500 million facility [3]. Agent revenue shares come out before Sky's net revenue line [5]. The Agents that deploy Sky's capital increasingly carry their own tokens, their own governance and their own claims on the yield they generate. If that continues, Sky's growth engine becomes a royalty on other people's tokens, a fine business and a different one from the one the $611.5 million forecast describes.
The near-term catalyst has already arrived. Stage 2 began in August: buybacks are scaling back up, stakers can take rewards in SKY or USDS, and half of each month's surplus keeps flowing to the reserve [9]. Monthly net protocol surplus was $9.71 million in May and $10.81 million in June [2], so the reserve compounds at roughly $5 million a month and the $150 million target lands in 2027. The foundation's full-year report, due early in 2027, will have to defend a top line running well behind its own forecast.
Reconciling the two sets of books
The two sources agree on the savings cost and diverge on the top line, and the divergence is definitional rather than a sign that either is wrong.
| Quarter | Gross revenue, SFF | Gross revenue, DefiLlama | Savings cost, DefiLlama | Net protocol revenue, SFF | Revenue after savings cost, DefiLlama |
|---|---|---|---|---|---|
| Q4 2025 | about $79 million (derived) | $108.18 million | $39.86 million | about $24 million (derived) | $68.32 million |
| Q1 2026 | $123.79 million | $103.02 million | $50.09 million | about $61 million (derived) | $52.29 million |
| Q2 2026 | $107.35 million | $98.43 million | $54.80 million | $40.09 million | $42.57 million |
Sources: [1][4][8][17]. SFF's Q4 2025 gross revenue and its Q4 and Q1 net revenue are derived from the growth rates and margins the foundation published, not stated directly.
DefiLlama's revenue line nets only the savings rate. The foundation's net protocol revenue also reflects Agent revenue shares, and its surplus further deducts the security and maintenance distribution and operating costs [5][3]. On the gross line the two differ in scope and accrual timing, and neither publishes a bridge. This piece uses the foundation for the bottom line, and DefiLlama to cross-check the savings cost and for token metrics and the 2021 history.
What the three scenarios have in common
A 12 percent Fed makes Sky rich and its token cheap. A 1 percent Fed makes Sky cyclical and its token expensive. Unchanged makes Sky a grind in which the only variable that matters is whether the free float grows faster than the savings bill, and where regulation and distribution, not the mechanism, decide the outcome. In all three, the reserve is the loss-absorbing layer, it is smaller than the book by a factor of more than a hundred, and for the first time it is being fed half of what the protocol earns.
Sky is a business that switches engines with the rate regime, wrapped in a token that only prices one of them at a time. That is not a criticism. It is the description a holder needs before deciding what they own.
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Methodological note: This analysis synthesizes protocol financial disclosures published by the Sky Frontier Foundation, on-chain data aggregators, ratings agency publications, SEC and company filings, central bank historical records, and primary press reporting. The numbered citation system allows readers to verify specific claims against original sources rather than relying on secondary interpretations.
Conflict disclosure: The author holds a position in SKY. The ixEDEL index deployed by the author on Reserve Protocol holds sUSDS, the Sky savings token discussed in this article; see the July 2026 rebalance note for the current basket. These holdings should be considered when evaluating the information presented.
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Publication information: Last updated: September 2026 | Series: Protocol Analysis | Publisher: The Genesis Address LLC
Sources and references
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Publisher: The Genesis Address LLC
