Summary
LlamaRisk supports removing USDS as collateral due to the change in its risk profile, as more Sky Agents via Stars (and future Institutional Primes) are allocated USDS collateral to generate risk-adjusted yield, expanding the risk surface of the collateral backing USDS. We also support increasing the RF from 10% to 25%, along with the proposed removal of USDS from E-modes on Prime and Core.
Architecture
According to the Asset Allowlist Classification (AAcA), USDS is a fiat-pegged stablecoin managed through a collateralized debt position (CDP). As of November 21, 2025, USDS has a circulating supply of $5.5B on Ethereum. Together with $4.4B DAI, it is backed by a diversified $12.1B collateral portfolio at a 122% collateralization ratio, with the underlying assets shown below.
Source: USDS Collateral, Sky, November 21, 2025
Sky allocates the USDS collateral to Sky Agents to generate yield for USDS, and these are as follows:
Stars
Stars within the Sky Ecosystem are protocols with autonomy to deploy USDS collateral through Sky Primitives into various DeFi and TradFi opportunities, generating “risk-adjusted yield.” Sky Primitives provides several benefits for Sky Agents (i.e., Stars), including the Allocation System, Boosted Distribution Reward, Integration Boost, SkyLink setup, Governance Access Reward, and the Pioneer System.
This structure allows Sky to manage the tail risks associated with Stars operating under the Sky Agent Framework, while Stars focus on innovation, adoption, growth, and profitability. Current active Stars are Spark, Grove, and Obex. In October 2025, Sky introduced the initial concept for the Star Allocation Framework, which plans to expand the ecosystem to additional Stars, capped at seven. This expansion increases the overall risk profile of USDS, as each new Star protocol introduces its own tail risks that can affect Sky.
The full list of future Stars has not yet been published, but the known entities so far are:
- Spark: The first Star under the Sky Agent Framework, currently allocated 33.65% ($4.03B) of the total USDS collateral. Their asset holdings are as follows:
Source: Top 10 Spark Allocations, Spark, November 21, 2025
- Grove: Manages 15.12% ($1.81B) of the total collateral, with focus on institutional and RWA allocation evident via their biggest holding being Janus Henderson JAAA ($1B).
Source: Grove Finance, November 21, 2025
- Obex: An incubator for institutional-grade stablecoin projects with a $2.5B mandate, they’re the latest addition to Stars, currently managing 0.75% ($90M) of the total collateral. The first allocation from Sky was made this week, on November 18, 2025. They intend to increase their SyrupUSDC allocation to $250M.
- Keel: A new addition to the Stars, designated as a “Pioneer” for the Solana ecosystem, though it has not yet been allocated collateral. Its initial areas of focus include Stablecoin Lending, RWAs and Tokenized Yield, Stablecoin Swap Liquidity, RWA Redemption and Secondary Liquidity, Liquidity and TVL Bootstrapping, and Savings across Solana, with an initial program of up to $2.5B. Its entire balance sheet will consist of funds borrowed from Sky.
- Others (yet to be announced)
The Allocation Framework sets a Base Rate, which functions as the cost of credit extended by Sky. Stars must generate returns above this rate to retain any value, pushing them toward more innovative and potentially riskier strategy deployments, as noted for each agent above.
The introduction of additional Stars diversifies the allocation of underlying collateral across more venues, thereby significantly expanding USDS’s risk surface. This expansion occurs as the backing becomes increasingly exposed to assets that Aave has either not onboarded or has isolated in separate instances to segregate their risk (such as Horizon for RWAs).
Institutional Primes
A future new category of Sky Agent, alongside Stars, was proposed on the Sky Forum: Institutional Primes. In concept, they are similar to Stars, with the key distinction that Institutional Primes have a fully KYC-restricted token holder base, unlike Stars such as Spark, whose tokens are freely tradable.
Institutional Primes also do not receive access to the Pioneer System under Sky Primitives, which provides rewards and incentives for Agents expanding to new chains. Unlike Stars, their number is not capped and can effectively be unlimited. USDS collateral will also be allocated to Institutional Primes through Sky’s credit lines.
Parameter Changes
Collateral Disabled
On Core, $9.1M worth of assets have been borrowed against USDS. Given the changed risk profile of USDS described above, we support disabling USDS as collateral and setting its LT/LTV parameters to zero, which would prevent additional suppliers from borrowing against it. On V3 Prime, USDS is already disabled as collateral.
Increase Reserve Factor (RF)
Source: USDS Supply APR Change, LlamaRisk, November 21, 2025
With the proposed increase in the USDS Reserve Factor (RF) from 10% to 25%, the supply APR would decrease by 28 basis points on Core and 24 basis points on Prime at their respective current utilization levels. This change would also result in a 150% increase in protocol revenue if utilization remains unchanged.
Removal from E-modes
On Core, USDS is currently borrowable only within the sUSDe, USDe, eUSDe, and PT-sUSDe-27NOV2025 E-modes and cannot be used as collateral. Of the $15.4M in total USDS borrows, 48.8% is backed by collateral originating from these E-modes, primarily sUSDe and USDe.
Given the low risk associated with USDS’s borrow-only status under E-modes, and considering current activity levels (shown below), we are comfortable with either keeping or removing USDS from E-modes on Prime and Core based on DAO preference, as this choice does not introduce any incremental risk.
Source: LlamaRisk, November 21, 2025
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.
Change log
Dec 1st, 2025: removal of USDS as a borrow asset in E-modes.
