Sky (MakerDAO): The Protocol Behind DAI and the Endgame Transformation

What Is Sky (Formerly MakerDAO)?

Sky, formerly known as MakerDAO, is one of the foundational protocols in DeFi and the issuer of DAI, the most widely used decentralized stablecoin.

Since launching in 2017, Maker established the blueprint for overcollateralised stablecoin issuance that many subsequent protocols have followed. In 2024, the protocol underwent a major rebrand from MakerDAO to Sky, introducing new tokens and a restructured governance framework as part of what its community calls the Endgame plan.

This guide covers how the protocol works, the significance of the rebrand, its governance structure, and the risks users should evaluate.

Understanding Sky requires looking at both its legacy as MakerDAO and its current trajectory, as the protocol occupies a unique position as both one of DeFi's oldest and most battle-tested systems and one that is actively undergoing its most ambitious structural transformation.

How DAI Works

DAI is a decentralised stablecoin pegged to the US dollar. Unlike centralized stablecoins such as USDC or USDT, which are backed by fiat reserves held by a company.

DAI is generated through overcollateralised lending on the Maker protocol. Users deposit collateral, ETH, WBTC, stETH, real-world assets, and various other approved tokens into Maker Vaults, and in return can generate (borrow) DAI up to a certain percentage of their collateral's value.

For example, if a user deposits $10,000 worth of ETH into a Maker Vault with a 150% collateralisation ratio, they can generate up to approximately 6,666 DAI. The deposited ETH serves as the backing for the newly minted DAI.

To retrieve their collateral, the user must repay the DAI they generated plus an ongoing stability fee (interest rate). If the value of the collateral falls below the required threshold, the vault is liquidated and the collateral is auctioned off to cover the outstanding DAI debt.

This mechanism means DAI's peg stability relies on economic incentives and governance-set parameters rather than a custodian holding dollars in a bank account. The system has maintained DAI's peg through multiple major market crashes since 2017, though it has experienced periods of deviation during extreme volatility.

The Peg Stability Module and DAI Savings Rate

Beyond vault-based generation, Maker introduced the Peg Stability Module (PSM) which is a mechanism that allows users to swap USDC for DAI at a 1:1 ratio (and vice versa) with minimal fees.

The PSM acts as a direct arbitrage mechanism to keep DAI's price close to $1. If DAI trades above $1, users can mint DAI cheaply through the PSM using USDC, increasing DAI supply and pushing the price down. If DAI trades below $1, users can redeem DAI for USDC, reducing supply and pushing the price up.

The DAI Savings Rate (DSR) allows DAI holders to deposit their DAI into a savings contract and earn yield. The yield comes from the stability fees paid by vault users, effectively, borrowers pay interest that funds the savings rate for DAI holders.

The DSR rate is set by governance and has varied significantly, from near-zero during periods of low demand to over 10% during periods when governance actively wanted to increase DAI demand.

The DSR has been one of the most important tools for Maker governance to influence DAI supply and demand dynamics.

The Endgame Rebrand: From Maker to Sky

In September 2024, MakerDAO executed its long-planned Endgame transformation, rebranding to Sky and introducing new tokens.

The MKR governance token can be converted to SKY at a ratio of 1:24,000, and DAI can be upgraded to USDS (Sky Dollar) at a 1:1 ratio. The original MKR and DAI tokens continue to function and are not being deprecated. Users can choose whether to upgrade to the new tokens or continue using the legacy versions.

The Endgame plan represents the most ambitious structural overhaul of a major DeFi protocol to date. Its core vision involves restructuring Maker's monolithic governance into a system of semi-autonomous SubDAOs (rebranded as Sky Stars). Aiming to manage specific functions, lending, RWA investments, growth initiatives, with their own governance tokens and treasuries, while the core Sky protocol maintains overall coordination and the monetary policy of USDS/DAI.

The rationale behind Endgame is that as the protocol has grown to manage billions of dollars in collateral and has expanded into real-world assets, the governance burden on MKR holders has become unsustainable.

By delegating specific functions to specialised SubDAOs, the system aims to scale governance capacity while maintaining the decentralisation properties that differentiate it from centralised stablecoin issuers.

Real-World Assets in Sky

One of Sky's most consequential strategic decisions has been its expansion into real-world asset (RWA) collateral. A significant portion of DAI/USDS backing now comes from US Treasury bills, corporate bonds, and other traditional financial instruments held through various legal structures.

As of early 2025, RWA exposure represented a major share of the protocol's total collateral, making Sky one of the largest DeFi consumers of tokenised real-world assets.

This RWA strategy generates substantial revenue for the protocol (since Treasury bills and other instruments earn yield), but it also introduces a fundamentally different risk profile compared to purely crypto-native collateral.

The protocol's exposure to traditional financial instruments means it is subject to counterparty risk with the entities that custody and manage these assets. Also, regulatory risk if authorities challenge the legal structures used, and the systemic risk of tying a decentralized stablecoin's backing to traditional financial markets.

Governance: SKY and MKR

Sky's governance has historically been one of the most active and sophisticated in DeFi. MKR (and now SKY) holders vote on a wide range of parameters: collateral types and their risk parameters, stability fees, the DAI Savings Rate, debt ceilings for individual collateral types, oracle configurations, and protocol upgrades.

The governance process uses executive votes (which directly modify the protocol's smart contracts) and governance polls (which signal community preferences).

The system employs a delegate model where MKR/SKY holders can delegate their voting power to recognised delegates, individuals or organisations who actively participate in governance discussions and vote on proposals.

This delegation system helps address voter apathy and concentrates governance participation among informed participants who follow the protocol's operations closely.

A distinctive feature of Sky's governance is the use of Spell contracts, bundled parameter changes that are voted on and, once approved, executed atomically through the protocol.

This means that a single governance vote can simultaneously adjust stability fees across multiple vault types, modify the DSR, update oracle parameters, and implement other changes, ensuring that interdependent parameter changes take effect together.

Competitors and Alternatives

In the decentralised stablecoin space, Sky/Maker faces competition from several directions.

Ethena's USDe uses a delta-neutral hedging strategy (holding crypto collateral while shorting perpetual futures) to maintain its peg, a fundamentally different mechanism from Maker's overcollateralised model.

Liquity's LUSD and its V2 successor offer governance-free, immutable overcollateralised stablecoins with different trade-offs around decentralisation and capital efficiency.

Frax Finance's FRAX has evolved from a fractional-algorithmic model to a more fully collateralised approach, and Frax's expansion into lending (Fraxlend), liquid staking (frxETH), and its own L2 chain (Fraxtal) makes it a broad DeFi ecosystem competitor.

On the centralized side, USDC (Circle) and USDT (Tether) dominate stablecoin market share by a wide margin. Also, Sky's ongoing challenge is demonstrating that the benefits of decentralised issuance justify the complexity and smart contract risk compared to these simpler alternatives.

Spark Protocol, which operates as a Sky Star (SubDAO), functions as a lending platform closely integrated with Sky. This is similar to how Aave operates independently but with direct ties to DAI/USDS as a key asset.

This vertical integration between stablecoin issuance and lending is a competitive advantage that few other stablecoin protocols can replicate.

Risks and Considerations

Despite its longevity, Sky carries several categories of risk.

Smart contract risk remains relevant, while Maker's core contracts have been live since 2017 and are among the most audited in DeFi, the ongoing Endgame transformation introduces new contracts and systems that have less battle-testing.

The complexity of the SubDAO structure, new token migrations, and evolving governance mechanics increase the surface area for potential vulnerabilities.

Collateral risk is multifaceted. Crypto-native collateral (ETH, WBTC, stETH) carries market volatility and liquidation risk. RWA collateral introduces counterparty risk, legal risk, and dependency on traditional financial intermediaries.

If any of the entities managing Sky's Treasury bill holdings were to fail or freeze assets, a significant portion of DAI/USDS backing could be affected.

Governance risk is particularly significant for Sky. The protocol's parameters are continuously adjusted through governance votes, and poor governance decisions. This sets stability fees too low, approving risky collateral types, or mismanaging the transition to the Endgame structure, could threaten DAI/USDS stability.

The concentration of voting power among large MKR/SKY holders and delegates means that governance outcomes may not always reflect the interests of all users.

Peg stability risk, while historically well-managed, is not zero. During the March 2023 USDC depeg event (triggered by Silicon Valley Bank's collapse), DAI temporarily lost its peg because a significant portion of its backing came through the USDC PSM.

This demonstrated how dependency on a single collateral source can create systemic vulnerability.

Regulatory risk is also a growing factor, as stablecoin-specific regulation is advancing in multiple jurisdictions and could impose requirements that conflict with Sky's decentralised governance model.

Exploring Sky via Portals.fi

Portals.fi is a DeFi aggregation platform that allows users to interact with protocols like Sky through a unified interface.

Users can access DAI/USDS-related DeFi activities, including swaps, lending, and yield opportunities, alongside interactions with other protocols from a single access point, simplifying navigation across the DeFi ecosystem.

This article is for informational purposes only and does not constitute financial advice. DeFi protocols carry inherent risks including smart contract vulnerabilities, governance risk, and market volatility.

Stablecoins may lose their peg under extreme market conditions. Always conduct your own research before interacting with any protocol. For our full disclaimer, please visit disclaimer.