Sky (formerly MakerDAO) lost $5 million in the first quarter of 2025

The loss was mainly due to the incentive to use the new stablecoin USDS instead of DAI, which led to a 102% surge in interest payments.

Decoding the shift: As the DeFi lending protocol known for its high interest payments, Sky (formerly MakerDAO) slid into the red in the first quarter, reporting a loss of $5 million, according to a report by Sky contributor Steakhouse Financial.

This marks a stark contrast to the previous quarter, which saw the protocol generate a profit of $31 million.

The report, which was compiled by Rhythm Little Deep and can be viewed here, highlights the 102% surge in interest payments to depositors as the main contributor to the loss.

"Sky's savings rate remained at 12.5%, which was very high relative to the rest of the market, and attracted a lot of inflows. When we lowered the rate to 4.5% in February, many chose to stay," said Sky co-founder Rune Christensen on Telegram.

A double-edged sword

The situation presents a double-edged sword for the protocol, which claims to be one of the first decentralized financial applications on ethereum, emerging in 2017.

To operate like a traditional bank, Sky needs to lend money to others at a higher interest rate than it pays depositors.

However, offering higher interest rates without a corresponding increase in the demand for the newer stablecoin, Sky USD (USDS), is dragging down the profitability of the protocol, explained Paper Imperium, governance liaison at blockchain research and development firm GFX Labs.

"USDS is a significant drag on yields. We are losing money on US baking and making money on DAI baking. This is interesting because it shows up in the P&L [profit and loss] statement despite no new revenue stream," Paper Imperium stated via Telegram.

The push for USDS is part of Sky's so-called "endgame plan," led by Christensen, to transform the protocol into a more decentralized and resilient system.

When Sky undertook a rebranding to launch USDS in August as part of its endgame plan, the initiative was to attract a different user base for the newer stablecoin.

Designed to be more compliant with regulations and financial reporting requisites, USDS is intended to appeal to hedge funds, family offices, and other sophisticated institutional investors who are seeking to engage in decentralized finance.

But it remains unclear whether USDS has managed to expand Sky's user base.

Weighing in further on the report's findings, Paper Imperium noted that while there are different yields for USDS and DAI — with USDS offering 4.5% yield and DAI at 2.75% — many investors swapped their DAI for USDS.

This swap move means that Sky had to pay more to users who were previously content with lower or no yields.

According to the report, the total amount of USDS and DAI has seen an increase of 57% since the beginning of the quarter. However, a large portion of this growth can be attributed to the synthetic dollar protocol Ethena, which has invested more than $450 million in staked USDS and passed the proceeds to users who staked its own stablecoin USDe.

In recent developments, Ethena has shifted part of its reserves from USDS to USDtb — a stablecoin backed by BlackRock's USD Institutional Digital Liquidity Fund (BUIDL), which was announced last week.

This move will reduce the circulating supply of USDS. Moreover, it could benefit Sky by decreasing the amount of interest that the protocol needs to pay.