Summary
stUSDS is a yield-bearing token within the Sky Ecosystem. It represents user deposits of USDS into a specific module that funds borrowing against staked SKY collateral. Holders of stUSDS earn yield from borrower interest payments but are also exposed to the risk of borrower default and liquidation shortfalls. During our review, LlamaRisk has identified a few obstacles for onboarding the asset into Aave, namely:
- Counterparty Concentration: The solvency of stUSDS is dependent on loans concentrated with a single entity.
- Conditional Liquidity: Redemption of stUSDS is dependent on system-wide borrowing utilization.
- Non-Standard Oracle: The price of the underlying collateral (SKY) is determined by a capped, time-delayed oracle with manual override capabilities.
- Manual Liquidation Process: The liquidation of the SKY collateral that underpins the value of stUSDS is not automated and relies on manual intervention by Sky Governance.
- Designated Loss Absorption: The stUSDS token is explicitly designed to absorb losses from liquidation shortfalls.
Based on the above, we suggest revisiting integration when these issues are resolved, and the DAO signals willingness to explore onboarding further. Below are the highlights of our initial due diligence:
Market Risk Factors
Borrower Concentration: The borrowing activity collateralized by staked SKY is highly concentrated; over 90% of the total USDS borrowed is attributable to a single address that holds four different positions. As of October 2025, the total borrowed amount from the four positions is 52,867,497 USDS out of a total of 56,612,265 USDS borrowed.
| Position | Amount Borrowed (USDS) | % of Total |
|---|---|---|
| Position 1 | 29,264,757 | 51.7% |
| Position 2 | 11,747,494 | 20.8% |
| Position 3 | 5,572,027 | 9.8% |
| Position 4 | 6,283,219 | 11.1% |
| Total (Single Entity) | 52,867,497 | 93.4% |
| Total System Borrow | 56,612,265 | 100% |
The creditworthiness and solvency of the stUSDS system are heavily dependent on a single counterparty repaying its loans, as it would be impossible to liquidate the position, as there is only $4m in liquidity on DEXs.
Liquidity and Redemptions: The ability to redeem stUSDS for USDS is conditional; when utilization is high, withdrawals may be limited until repayments occur or new liquidity returns. In the initial bootstrapping phase, it was noted that “USDS deposits will be temporarily illiquid” above 100% utilization.
In a high-utilization scenario, Aave liquidators may not be able to redeem stUSDS for underlying USDS, which would be necessary to make the Aave protocol whole after a liquidation. Furthermore, liquidations are inherently problematic as there is no reliable secondary market to establish a price for stUSDS.
Technical and Oracle Risk Factors
Oracle Mechanism (OSM - Oracle Security Module): The price of the underlying SKY collateral is not derived from a standard market price feed. The system uses a “Capped OSM SKY price.” Currently, the market SKY price is at $0.0593, while the Capped OSM price used for collateral calculations is $0.04. This is a deliberate design feature described as the “Sticky Oracle system.” The documentation for the Oracle Security Module (OSM) describes administrative roles (wards) that have the authority to change the price feed source and stop the feed entirely.
Aave would be exposed to risks originating from the administrative and governance decisions of an external protocol, which may be influenced by the largest SKY holders.
Liquidation Process and Risk
Manual Liquidations: The liquidation process for the underlying staked SKY collateral is not automated. “Automatic liquidations are temporarily turned off […] If a Staked SKY position becomes undercollateralized, Sky Governance will manually liquidate it”.
There is no on-chain mechanism for an Aave liquidator to force the liquidation of the underlying SKY collateral.
Liquidation Shortfall Risk: The design of stUSDS explicitly places the risk of loss on its holders. The stUSDS documentation states, “If a borrower’s staked SKY collateral is liquidated and the proceeds don’t fully cover the debt, the stUSDS vault absorbs the shortfall via a proportional haircut to the vault’s exchange rate.”
In the event of a failed liquidation of the underlying SKY, the value of the stUSDS held as collateral by Aave would decrease, potentially leaving Aave with bad debt.
Disclaimer
This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.