| Author: | Stake DAO Association |
|---|---|
| Date: | May 2026 |
| Forum debate: | 3 days (concurrent with the voting period) |
| Voting period: | 3 days | Quorum: 15% vlSDT | Simple majority |
Unless otherwise noted, on-chain and market data referenced in this proposal is current as of 13/05/2026.
Nature of the Proposal
This proposal is submitted under the Stake DAO Governance Framework (SDGP-66). It is a governance process artefact intended to record a community decision regarding the configuration of an on-chain lending market. Nothing in this proposal: (i) creates a contract, fiduciary duty, agency relationship, partnership, or joint venture between Stake DAO Association, its contributors, or any curator on the one hand and any participant on the other; (ii) constitutes an offer or solicitation for the provision of any service; or (iii) is intended to confer any enforceable right on any participant, beyond such rights as may arise as a matter of mandatory law that cannot be excluded. The legal seat, form, and applicable law governing Stake DAO Association are set out in its constitutional documents.
Summary
This Lending Market Adjustment Proposal (LMAP) seeks governance authorization to enable a new Morpho lending market within the Stake DAO frxUSD v2 curated vault, accepting the Stake DAO frxUSD/sUSDS LP token as collateral against frxUSD at a 94.5% Liquidation Loan-to-Value ratio (“LLTV”), with an initial absolute supply cap of 400,000 frxUSD and a 100% relative allocation within the vault.
Market ID: 0x87e3786114cbe9d3fcace0eb4099fa70a4b916039db4a29626cae89147180ca3
The collateral is the Stake DAO auto-compounding wrapper (0xdA36Ab65d5Af53763CAcD63AE7D441932032326f) of the Curve factory-stable-ng-343 pool pairing frxUSD with sUSDS, Sky Protocol’s yield-bearing savings token. Under Stake DAO’s three-layer risk methodology (Asset / Platform / Market), the loan asset of the vault is not separately scored as a collateral asset. Accordingly, the substantive due diligence under this methodology was conducted on sUSDS alone. This proposal does not opine on the standalone risk profile of frxUSD; participants should form their own view of frxUSD risk independently.
The proposal targets expanding the yield sources available to frxUSD lenders, while seeking to mitigate exposure through a conservatively-sized initial absolute cap, pending observation of market behaviour and pool growth.
Risk Assessment Summary
The full risk evaluation is published in the Market Risk Evaluation worksheet: Market risk evaluation — frxUSD/sUSDS (Google Sheet)
For the avoidance of doubt, the version of the worksheet relevant to this proposal is the version published as at 15/05/2026; an immutable PDF snapshot of that version is available here. Subsequent changes to the worksheet do not amend this proposal.
Final grade: B
Final internal grade under Stake DAO’s three-layer methodology: B. This grade is generated by Stake DAO’s internal framework and is not a credit rating, regulatory determination, audit certification, or warranty as to safety or suitability.
(see appendix for grade signification)
| Layer | Grade | Rationale (worst pillar) |
|---|---|---|
| Layer I — Asset (sUSDS) | B | Despite a high quality token and social environment, the asset rating was constrained by the combination of the ability to pause the contract via governance and the concentrated governance through a handful of delegates (UUPS-upgradeable proxy controlled by MCD_PAUSE_PROXY; two delegates controlling together c. 80% of the voting power). |
| Layer II — Platforms (Curve + Stake DAO)[1] | S | Both platforms hold the framework’s reference rating. |
| Layer III — Market (frxUSD/sUSDS pool) | A | Pool health = 4 (Pool TVL $1.73M = 3, Vault cap / Pool diluted TVL = 19%); all other sub-pillars (Price feed, Underlying asset liquidity, Price fluctuation) score 5–6. |
| Red flags | 0 | No single criterion scored D (1/6). |
| Overall | B | Worst layer is Asset (Layer I). |
Key takeaways
Strengths. sUSDS is one of the most liquid stablecoins on-chain. As of 13/05/2026, the underlying asset liquidity is exceptional: approximately $5.93B sUSDS supply, with approximately $4.08B of immediately accessible exit liquidity (LitePSM USDC POCKET of approximately $3.93B plus approximately $160M of USDS on DEXs), versus an initial vault cap of $400k (approximately 0.01% of total immediate liquidity as of that date).
Under prevailing liquidity conditions modelled as of 13/05/2026, simulated slippage for both 10% and 100% of the cap rounds to zero. Actual slippage in adverse or stressed market conditions may differ materially.
The Curve pool has a 15-month operational track record from the reference date (the ‘Lindy’ criterion under the framework; see Appendix A), an A factor of 1500, and concentration metrics within the thresholds defined under the framework as of 15/05/2026 (top-1 LP excluding POL = 11.6%; top-5 = 38.4%), with a healthy trading frequency (40 average daily trades, minimum 8 over the 30-day period ending on 13/05/2026).
Under the framework’s price-feed criterion, this market scores at the maximum tier (6) because, as an LP token, the oracle derives value with zero hops, and the path-quality and heartbeat sub-criteria each score 6.
Limiting factor. The grade is capped at B by the Asset Technical sub-pillar. Two structural elements drive this:
-
Pause / upgrade capability over the contracts. sUSDS is a UUPS-upgradeable proxy whose admin is the
MCD_PAUSE_PROXY(governance-controlled with a 16–30h GSM Pause Delay). The Sky Protocol equivalent of “Mint/burn/freeze with timelock” puts Admin capabilities at 2/6, capping the Technical sub-pillar score. Upgradeability and pause functionality controlled by a governance-delayed admin are widely deployed features in production-grade smart-contract systems and are not, in themselves, indicia of vulnerability; under Stake DAO’s framework, however, they cap the Technical sub-pillar at the score noted. -
Concentration of governance power among top delegates. The largest delegate (operating under the publicly disclosed name Cloaky V3) currently holds approximately 45% of effective voting power. Combined with the founder’s direct holdings and his identification as the top user of the LSEV2-SKY-A SKY-backed borrowing system funded by stUSDS, this creates a structural concentration that constrains the Decentralisation criterion to 5/6 and forms the dominant qualitative risk to monitor.
The Market layer (A) and Platform layer (S) ratings both clear the threshold for High Yield vault eligibility. Stake DAO frxUSD v2 is a High Yield vault, making the asset eligible for inclusion at a conservatively sized cap.
Proposed Market Parameters
| Parameter | Value |
|---|---|
| Vault | Stake DAO frxUSD v2 0xCE13e39534082FCF8f13F6D84e6D95414D14271e |
| Loan asset | frxUSD (0xCAcd6fd266aF91b8AeD52aCCc382b4e165586E29) |
| Collateral asset | Stake DAO frxUSD/sUSDS LP wrapper (0xdA36Ab65d5Af53763CAcD63AE7D441932032326f) |
| Underlying Curve pool | 0x81A2612F6dEA269a6Dd1F6DeAb45C5424EE2c4b7 (factory-stable-ng-343) |
| LLTV | 94.5% |
| Absolute supply cap (initial) | 400,000 frxUSD |
| Relative allocation cap in vault | 100% |
| Oracle setup | LP-token oracle, leveraging the asymmetric path (collateral LP token = 0 hops; non-loan leg sUSDS priced via Chainlink Sky Savings Rate Oracle with CAPO protection) |
| Market ID | 0x87e3786114cbe9d3fcace0eb4099fa70a4b916039db4a29626cae89147180ca3 |
Monitoring & Cap-Adjustment Triggers
Stake DAO will use commercially reasonable efforts to monitor the following triggers on an ongoing basis after market activation, subject to data availability and the continued operation of relevant on-chain and off-chain data sources. Stake DAO does not guarantee the continuous availability of monitoring or the timely detection of, or response to, any trigger event. Subject to the foregoing, the occurrence of a trigger event is intended to result in the submission of a re-evaluation LMAP to governance:
- Pool TVL falls below $1M for 14 consecutive days.
- Pool average daily trades below 5 for 14 consecutive days.
- Any change or development in the Sky ecosystem that Stake DAO, acting reasonably, considers material to the risk profile of sUSDS, including by way of non-exhaustive example: material changes to the stUSDS Liquidation Ratio, the Surplus Buffer, the LSEV2-SKY-A debt ceiling, the upgradeability or governance of the sUSDS or USDS contracts, or to the LitePSM module.
- Sustained material deviation, downtime, or material change in the Chainlink Sky Savings Rate Oracle or its successor.
- Any enforcement action, regulatory order, or material public regulatory communication affecting frxUSD, sUSDS, USDS, the Sky Protocol, the Morpho protocol, the Curve protocol, or Stake DAO that Stake DAO, acting reasonably, considers material to the market.
- Any material change to the Stake DAO frxUSD/sUSDS LP wrapper, the underlying Curve pool, or the receiving vault.
More broadly, market parameters will be continuously monitored and follow-up proposals can be published to increase or decrease the initial cap.
Vote
For (Yes): Authorise to deploy on the Morpho protocol the frxUSD/sUSDS LP market on the parameters described in this proposal and to include such market in the Stake DAO frxUSD v2 vault allocation.
Against (No): Reject the activation of the market.
Abstain: Take no position on this proposal.
References
- SDGP-66 — Updated Governance Framework: SDGP-66: Updated Governance Framework for vlSDT
- SDGP-58 — Curation Vertical: SDGP-58: Boost Stake DAO growth by launching a Curation Vertical
- Market Risk Evaluation worksheet — frxUSD/sUSDS: Market risk evaluation - frxUSD/sUSDS - Google Sheets
- Sky Protocol documentation: https://docs.sky.money / https://developers.sky.money
- Curve pool (factory-stable-ng-343): Curve.finance
- Morpho Vault documentation: Morpho Vault V2 – Morpho Docs
- Stake DAO Morpho category on Morpho forum: About the Stake DAO category - Stake DAO - Morpho Governance Forum
Appendix - Methodological choices and risk discussion
This appendix documents the substantive choices made during the risk assessment and discusses material qualitative risks that informed but do not mechanically alter the final grade. It is published as part of the LMAP for governance transparency.
A. Lindy reference date: 4 September 2025
The Lindy criterion was scored on the basis of the most recent material change to the sUSDS minting and risk envelope. Three candidate dates were considered:
- The deployment of the sUSDS contract itself (17 months old at evaluation date).
- The deployment of the underlying crvUSD-equivalent system primitives (more than 24 months).
- Material changes to the connected economic system that altered the risk profile of sUSDS holders.
Evaluation date: 13/05/2026.
We retained the third reading, and selected 4 September 2025 - the onboarding of stUSDS / LSEV2-SKY-A - as the reference date, yielding 8 months of lindy at the time of evaluation. This is more conservative than scoring the contract age in isolation (which would yield 5/6), but more lenient than re-anchoring on every parametric tweak (which would defeat the purpose of the criterion).
The rationale: stUSDS introduced an entirely new minting pathway for USDS, backed by SKY collateral and funded by a risk-bearing tranche. While USDS holders are architecturally insulated from this pathway (see section D below), the introduction of LSEV2-SKY-A constitutes a material change to the connected economic system. Subsequent additions (Obex incubator launches in March 2026, the Avalanche SkyLink deployment in April 2026, the YieldBasis credit line expansion) are all bounded by debt ceilings absorbed by the Surplus Buffer and are not material enough to re-anchor the Lindy date.
Final Lindy grade: 3 (B).
This choice of reference date is a methodological judgement by Stake DAO. Alternative reference dates would yield different scores; the alternatives and the reasoning supporting the chosen date are recorded above in the interest of transparency.
B. Underlying asset liquidity - convention used
For Total liquidity, the convention adopted was:
Total liquidity = min( USDS instantly swappable to USDC, USDS redeemable from sUSDS )
Where “USDS instantly swappable to USDC” includes both DEX TVL on USDS pairs and the Sky LitePSM. The LitePSM is conceptually distinct from a DEX (it is a protocol-internal module, not an AMM), but functionally equivalent for exit-path purposes: it executes USDS-to-USDC swaps atomically at $1.00 with zero slippage, capped only by the USDC balance of the MCD_LITE_PSM_USDC_A_POCKET (an externally-owned Coinbase-Custody-MPC-controlled account, see section C below). At the time of evaluation (13/05/2026), this balance was $3.925B, and the USDS DEX TVL on Ethereum contributed an additional ~$160M.
USDS redeemable from sUSDS (the second leg) is approximately $6.5B (sUSDS supply of 5.93B shares × pricePerShare of 1.096), exceeding the first leg, so the binding constraint is the swappable USDS leg. Total liquidity used in scoring as of 13/05/2026: $4.084B.
This represents a comfortable buffer of more than four orders of magnitude over the initial vault cap of $400k.
C. The LitePSM POCKET - known structural risk
As of 13/05/2026, the approximately $3.925B USDC backing the LitePSM is held on an externally-owned account (EOA) controlled by Coinbase Custody using multi-party computation (MPC). This was the subject of public concern in December 2024 when discovered. Public statements attributed to representatives associated with the Sky Protocol have indicated that the relevant private-key material was destroyed during initial setup. Stake DAO has not independently verified this statement; given the nature of the underlying multi-party computation custody arrangement, on-chain verification is not technically possible. The statement is presented for informational purposes only and without endorsement or contradiction. We understand from publicly available sources [insert citation, including URL and access date] that a bug-bounty submission relating to this issue was declined on scope grounds, with the rationale recorded as: ‘impacts caused by attacks requiring access to privileged addresses outside scope’ (verify exact wording against the cited source).
The risk has been documented publicly for over 18 months without incident.
We treat this as a known structural risk that is shared by all integrators of USDS/sUSDS, neither escalating nor discounting it. It does not change any of the scoring grades, but is disclosed here.
D. The stUSDS / Rune Christensen exposure - quantified
The Sky Protocol introduced stUSDS in October 2025 as a “risk capital token” funding SKY-backed borrowing through the LSEV2-SKY-A module. According to publicly available disclosure, one of the largest positions in the LSEV2-SKY-A SKY-backed borrowing module is attributed to Rune Christensen, a co-founder of Sky Protocol. The concentration of borrowing within a small number of positions has been the subject of public discussion regarding governance and economic dynamics within Sky Protocol. Stake DAO does not adopt those characterisations, does not make any allegation regarding the conduct, motivations, or compliance of Mr. Christensen or of any other named individual, and presents this information for context only, on the basis of publicly available sources cited herein. Since February 2025, several governance parameter changes have been adopted, including a reduction of the Surplus Buffer from $120M to $70M, a lowering of the stUSDS Liquidation Ratio from 145% to 120%, and adjustments to the borrowing terms of the LSEV2-SKY-A module. Some governance participants have publicly expressed the view that the cumulative effect of these changes may be more favourable to larger existing borrowers; references to those public statements are available at [insert citations]. Stake DAO does not adopt those views; the parameter changes are described here on a factual basis, and the inferences drawn by third parties are reported solely for completeness.
Sky’s documentation states that stUSDS is structurally isolated from USDS and sUSDS holders, in the sense that bad debt from SKY-backed liquidations is first absorbed by slashing the stUSDS pool itself (via the cut() mechanism). The Sky GitHub repository acknowledges, however, that “slashing due to bad debt accrual might bring a risk of depeg/devaluation on other markets,” signaling that the isolation is real but not absolute.
Illustrative Scenario (Hypothetical - Not a Forecast). The figures below (all figures as of 13/05/2026) are illustrative only and based on simplifying assumptions; they do not constitute a forecast, prediction, or recommendation, and should not be relied upon for any investment or risk-management decision.
- stUSDS pool size: ~$208M
- Liquid (immediately redeemable) portion: ~$70M
- Borrowed (illiquid) portion: ~$138M
- Sky Surplus Buffer: ~$70M
- Worst case (SKY → $0 and all liquid holders exit before slash): bad debt of ~$138M, of which $70M absorbed by Surplus, leaving an unabsorbed residual of approximately $68M
- USDS total supply: ~$11.7B
- Residual under-backing in this scenario: 0.58% of USDS supply
This magnitude is below the threshold typically associated with peg disruption events, and would be replenished by 2 - 3 months of normal protocol revenue. It is also conditional on a tail event (SKY going to zero) that is unlikely to occur in isolation — it would typically be the result of, or accompanied by, a broader systemic Sky failure that would dominate the bad-debt loss anyway.
For these reasons, the stUSDS exposure is reflected in the score through the Decentralisation criterion (5/6) and the Lindy criterion (3/6), rather than through a separate downgrade. The monitoring triggers in the main proposal include stUSDS pool size, Surplus Buffer level, and stUSDS Liquidation Ratio in order to detect material deterioration.
E. Governance concentration and its mitigants
Based on publicly available delegation data as of 13/05/2026, the largest single voting delegate on Sky governance, operating under the publicly disclosed name ‘Cloaky V3’, holds approximately 45% of effective voting power. The concentration of voting power among a small number of delegates is the dominant qualitative consideration informing the Decentralisation criterion for this evaluation. This statement should not be construed as a characterisation of the conduct, intent, or motivations of any delegate.
Three on-chain features are commonly cited as potential mitigants to delegate concentration risk. They are described below for completeness; their actual mitigating effect in any given event will depend on a range of factors, including the speed and coordination of counter-vote organisation and the substance of any impugned governance action:
-
GSM Pause Delay (16 - 30h). Every governance spell affecting USDS or sUSDS parameters is subject to a delay between approval and execution. During this window, depositors can exit positions, and any party can publish a counter-spell.
-
Protego mechanism (deployed 15 May 2025,
0x5C9c3cb0490938c9234ABddeD37a191576ED8624). Protego enables a permissionless drop-spell that can cancel a pending malicious spell during the GSM Pause Delay, provided the cancelling spell can reach the governance “hat” (i.e. accumulate more votes than the targeted malicious spell). With Cloaky V3 holding 45%, defeating a Cloaky-aligned spell is tight but not impossible. -
Delegates alignment. Large delegates or voters are structurally aligned and would not benefit from any malicious activity impacting Sky. Were the largest delegate’s voting position to be compromised, lost, or used in a manner contrary to the interests of the protocol, other voters could, in principle, assemble sufficient counter-votes through the mechanisms described above.
This justifies the Decentralisation score of 5/6: fully on-chain governance but high concentration of voters.
F. Audits - counting convention
The Audits criterion was scored at 5 (S), reflecting two tier-1 audits identified on the current technical stack as of the evaluation date: an audit by ChainSecurity dated 30/09/2024 and accessible here, and an audit by Spearbit/Cantina dated 26/09/2024 and accessible here.
G. Peer reviews - listed curators
The Peer reviews criterion was scored at 5 (S). As of 13/05/2026, based on publicly available data, sUSDS is reportedly accepted as collateral in markets curated by Steakhouse, Gauntlet, Hyperithm, and Sentora on the Morpho protocol. The inclusion of sUSDS in markets curated by other parties does not constitute an endorsement of sUSDS by those parties or by Stake DAO.
In December 2025, Aave governance reportedly voted (by a 99.6% majority) to delist USDS as collateral. The risk-assessment provider LlamaRisk publicly described the rationale, in pertinent part, as “USDS generates negligible revenue while its issuance model introduces asymmetric risks that could impact Aave’s stability”. The action concerned USDS rather than sUSDS, and accordingly does not directly affect the sUSDS-specific score; it is included here for completeness.
H. Layer III - Pool health note
Pool TVL is the binding sub-pillar within Pool health, scoring 3 (B) at $1.73M. This is the principal reason the Layer III rating is A (4) rather than S (5) or S+ (6). The 100% relative allocation within the vault is therefore counterbalanced by the conservative absolute cap (400k frxUSD) and by the monitoring trigger on pool TVL falling below $1M.
The vault-cap / pool-TVL ratio of 18.78% at activation is within acceptable bounds for a market scoring 4 on Pool health, but Stake DAO will not propose any cap increase that would push this ratio above 30% without re-evaluating Pool health first.
I. Grade meaning and aggregation rules - recap
Here is how to understand Stake DAO’s rating framework.
| Score | Grade | Meaning | Vault eligibility |
|---|---|---|---|
| 6 | S+ | Most blue chip assets, with deep liquidity, immutable, long standing life (e.g. WETH) | Core vaults |
| 5 | S | Blue chip assets with deep liquidity, high level of trust (e.g. sUSDe) | Core vaults |
| 4 | A | Less common asset with solid security set up, and deep liquidity and experience. | High yield vaults |
| 3 | B | More niche assets, with lower liquidity, slightly higher risk profile, but solid security set up and reputation. | High yield vaults |
| 2 | C | Assets that would be deemed too risky for inclusion in normal vaults, but could fit in special mandates of partner vaults. | Partner vaults |
| 1 | D | Assets that are assessed as too risky to be added to any vault curated by Stake DAO. | None |
For transparency, the aggregation rules applied in this evaluation are:
- Each criterion graded 1 - 6.
- Each pillar = worst criterion in the pillar (e.g. Asset pillar = min of Technical, Reserves, Asset class).
- Technical sub-pillar = arithmetic mean of Admin capabilities and Governance security, rounded down.
- Each layer = worst pillar in the layer.
- Overall grade = worst layer across the three layers.
- Red flag: any criterion scoring D (1/6) constitutes a red flag; accumulating multiple red flags triggers an additional one-notch downgrade.
For this assessment: Layer I = 3, Layer II = 5, Layer III = 4; 0 red flag → Overall = 3 (B).
J. Conflicts of Interest
Participants should note the following potential conflicts of interest in connection with this proposal:
(i) Stake DAO is the curator of the Stake DAO frxUSD v2 vault that would receive the proposed market and may earn curation fees on assets allocated to that vault.
(ii) Stake DAO is the issuer of the Stake DAO frxUSD/sUSDS LP wrapper (0xdA36Ab65d5Af53763CAcD63AE7D441932032326f) that constitutes the proposed collateral asset, and may earn fees in connection with that wrapper.
These positions may give rise to incentives that differ from those of participants in the market. Voters are encouraged to take these factors into account when evaluating the proposal.
K. Forward - Looking Statements
This proposal contains forward-looking statements, including estimates and assumptions regarding liquidity, market behaviour, monitoring activities, illustrative scenarios, and operational continuity. Forward-looking statements are based on present information and assumptions that may prove incorrect. Actual outcomes may differ materially from those expressed or implied by such statements. Stake DAO Association undertakes no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this proposal.
L. Eligibility and Restricted Participation
The proposed market may not be available to, or may be unlawful for, residents of, persons located in, or persons acting on behalf of, certain jurisdictions or categories of persons, including persons subject to comprehensive economic sanctions imposed by the United Nations, the European Union, the United States Office of Foreign Assets Control (‘OFAC’), His Majesty’s Treasury of the United Kingdom, or any other competent authority. Participants represent that their participation does not contravene any law applicable to them and that they are not acting on behalf of any sanctioned party. Participants are solely responsible for determining their eligibility under applicable law.
This proposal follows the Stake DAO Governance Framework (SDGP-66).
Note: the Platform-layer rating in respect of the Stake DAO platform is assigned by Stake DAO to its own platform pursuant to the framework’s reference-rating mechanism. Reviewers should weigh this self-assessment accordingly. ↩︎