Introduction
Launched in 2015 as MakerDAO and rebranded in 2024, the Sky Protocol represents a cornerstone of decentralized finance (DeFi). Its inaugural whitepaper (December 2017) introduced the Dai Stablecoin System, initially supporting only Ethereum (ETH) as collateral via Collateralized Debt Positions (CDPs). By November 2019, the protocol evolved into a Multi-Collateral Dai (MCD) system, accommodating diverse asset types. This whitepaper focuses on core components like the MCD system, Dai/USDS stablecoins, and vaults—primarily written in 2019 but updated to reflect 2024’s ecosystem changes.
Sky Protocol: Features and Architecture
Protocol Overview
Ethereum’s Largest dApp: The Sky Protocol is a decentralized application (dApp) governed by MKR token holders through a dual-process system:
- Executive Voting: For executing protocol changes.
- Governance Polling: For consensus-building.
- Scientific Governance: A framework ensuring transparent risk management and Dai stability. Each staked MKR token equals one vote.
Dai Stablecoin
- Decentralized & Collateral-Backed: Soft-pegged to the USD, Dai is generated by depositing assets into Sky Vaults.
Key Properties:
- Store of Value: Stability in volatile markets.
- Medium of Exchange: Global transactional use.
- Unit of Account: Priced at 1 Dai = 1 USD.
- Deferred Payment Standard: Settles debts within the protocol.
Collateral Assets
- Approved Ethereum Assets: Governance votes determine acceptable collateral (e.g., ETH, WBTC) and associated Risk Parameters (e.g., Liquidation Ratio, Debt Ceiling).
USDS Stablecoin (Launched 2024)
- Enhanced Security: Similar to Dai but upgradeable for potential freeze functionality (subject to governance) to align with global regulatory frameworks.
- Acquisition: Convertible 1:1 with Dai via a converter contract, tradable on exchanges, or earned through Sky Savings Rate (SSR).
Sky Vaults: Core Mechanics
Vault Operations
- Collateralization: Users deposit assets (e.g., ETH) into vaults.
- Dai Generation: Mint Dai against locked collateral.
- Debt Repayment: Return Dai plus Stability Fees to withdraw collateral.
- Collateral Withdrawal: Reclaim excess collateral post-repayment.
Liquidation Process
Automated Auctions: Triggered if collateral value falls below the Liquidation Ratio.
- Collateral Auctions: Sell vault assets to cover debts.
- Reverse Auctions: Minimize collateral sold; return leftovers to users.
- Protocol Debt Handling: Deficits are covered via Debt Auctions (MKR minting) or Surplus Buffer Dai.
👉 Explore Sky Vaults in Action
RWA Vaults: Bridging DeFi and Traditional Finance
Real-World Assets (RWAs)
- Tokenized Off-Chain Assets: Includes real estate, bonds, and commodities.
Components:
- RWA Urn: Governance-controlled vault.
- RWA Token: Non-transferable collateral representation.
- Liquidation Oracle: Off-chain price and status updates.
Liquidation Process
- Soft Liquidation: Grace period for covenant breaches.
- Hard Liquidation: Debt written off if unrecoverable; protocol absorbs losses.
Future under Sky Ecosystem
- Stars Initiative: Autonomous projects managing RWAs via the Allocation System for diversified, risk-adjusted returns.
Governance and Risk Management
MKR Token Roles
- Voting Power: Approves protocol upgrades and risk parameters.
- Recapitalization: MKR minted during Debt Auctions to cover system shortfalls.
Key Risk Parameters
| Parameter | Purpose |
|---|---|
| Debt Ceiling | Caps debt per collateral type. |
| Stability Fee | Annual fee on generated Dai. |
| Liquidation Ratio | Minimum collateral-to-debt ratio. |
Mitigation Strategies
- Smart Contract Audits: Formal verification and third-party audits.
- Emergency Shutdown: Freezes protocol to enforce Dai’s Target Price (1 USD).
Price Stability Mechanisms
Dai Target Price
- 1 USD Peg: Maintained via governance adjustments to the Dai Savings Rate (DSR).
Emergency Shutdown Phases:
- Protocol freeze; collateral withdrawals.
- Auction processing.
- Dai holders claim collateral at fixed rates.
FAQ Section
How is Dai different from USDS?
- Dai: Fully decentralized, no freeze functionality.
- USDS: Upgradeable for potential regulatory compliance.
What happens if my vault is liquidated?
- Assets are auctioned; excess collateral is returned after debts are covered.
How does governance vote on changes?
- Via Executive Voting (binding) and Governance Polling (advisory).
👉 Learn More About Sky Governance