Sky has long been a pioneer in the stablecoin market. However, in recent years the protocol has faced difficulties keeping pace with the accelerated growth of the sector. While Sky was once the leading decentralized stablecoin and the third largest overall after USDC and USDT, it has since struggled to maintain this position. Understanding the dynamics behind this slowdown is key to identifying a path forward.

In its early phase, Sky experienced rapid expansion, closely aligned with the broader growth of the stablecoin market. However, as the market entered a new wave of accelerated growth in late 2023, Sky initially failed to participate. The launch of USDs eventually contributed to some growth, but it remained well below market averages, leading to a loss of Sky ’s historic position as the most important stablecoin after USDC and USDT.

A key factor holding back growth is Sky ’s absence as a major stablecoin counterparty in trading. Without such positioning, it becomes difficult to scale effectively. The recent proposal with Hyperliquid reflects a shift in this direction, even if somewhat reactive.

This aligns with the idea I previously called No Trading / No Growth: without strong trading demand, growth is limited. If pursued proactively, such a strategy could have nearly doubled USDs’ growth. While it was originally suggested that a Star could take this initiative, it is appropriate that MakerDAO’s leadership stepped in to present an offer. This is a positive step and highlights the protocol’s strengths compared to alternatives. Still, it underscores the urgency of competing for USDs to become a trading stablecoin—a goal that remains unmet.

USDS Growth Strategy: No Trading, No Growth

Back on May 15 of this year, I highlighted the following point: “By forming strategic agreements, such as replacing USDT/USDC with USDS on major decentralized exchanges like dYdX or Hyperliquid, and offering targeted incentives for liquidity provision in DEX, USDS can secure its position as the most efficient pair with crypto assets and take the lead in liquidity with ETH.”

This type of growth has a unique advantage: it is the most profitable way to scale. In trading, investors typically do not demand yields. This allows the protocol to increase the share of stablecoins that do not need to be remunerated, unlike other growth drivers where gains depend on interest rate differentials.

Such growth creates room to offer higher yields (extra yield) to other investors. For example, Sky’s last wave of growth came from offering 12% rates for several months, which successfully attracted capital that stayed in the protocol.

Looking at the rapid rise of other stablecoins, including those that ultimately failed, one pattern is clear: all relied on excessively high yields. Terra’s collapse, however, was not due to its high yield but rather its flawed algorithmic backing. The yield itself could have been considered a marketing expense, sustainable if later adjusted downward.

More recently, Ethena has shown once again that high extra yields can drive explosive growth, though the challenge lies in sustaining them over time.

The launch of Stars was intended as a way to provide extra yield and fuel growth. Yet the results have been disappointing. Several issues stand out:

• Non-tradable tokens: Many incentives were distributed in tokens that were not yet trading, meaning investors did not perceive the promised 12% yield.

• Inefficient farming: Rewards have gone to a small pool of capital, effectively undervaluing the tokens being distributed.

• Spark’s dilemma: While Spark’s token is tradable, its yield is not attractive enough to drive growth. Moreover, Spark faces constant downward price pressure from reward selling, as stablecoin investors seeking yield continuously sell their incentives.

Ultimately, growth depends on finding ways to offer extra yield that can be funded by the value the protocol creates. The key question is: how can MakerDAO sustainably provide investors with yields around 12%?

Two paths that can be explored:

1. Becoming the trading counterparty: Positioning USDs as a stablecoin used directly in trading markets. This approach has a critical advantage: it creates a large base of non-remunerated stablecoins, since traders typically do not expect a yield on their trading counterparties. As a result, the protocol can redirect this efficiency to increase the remuneration for the rest of the capital, offering more attractive returns to long-term investors.

2. Exploring structured incentives through Stars: Sky could explore ways to structure the incentives of Stars so that stablecoin investors can access yields around 12%. This could be supported by other investors willing to take on illiquidity risk in order to capture the value being created. The current structure, where Stars distribute their tokens directly, tends to create dynamics that fail to properly reflect this underlying value. A redesigned approach could align incentives more effectively and provide a clearer path toward sustainable growth.

Sky remains one of the strongest and most innovative protocols in DeFi, but its growth challenges are real. To regain momentum, the project must revisit its current strategy, with a focus on becoming a key trading stablecoin and creating sustainable ways to deliver attractive yields. The goal is not just short-term expansion but building a foundation for long-term competitiveness in an increasingly crowded stablecoin market