Originally published on: December 06, 2024
Sky, formerly known as MakerDAO, is under scrutiny for its approach to managing $756 million in USD Coin reserves through an externally owned account (EOA) in its lite peg stability module (PSM).
The criticism stemmed from concerns raised by a user about the protocol’s heavy reliance on an EOA to oversee a significant portion of its reserves, totaling $756 million in USD Coin (USDC).
Detractors argue that entrusting funds to this custodianship model could expose them to vulnerabilities, including potential exploits or insider misuse, raising questions about the security and transparency of Sky’s fund management system.
Following its rebrand to Sky and amid doubts about its ability to implement a freeze function in the future, the risk of a breach or mismanagement of these EOA-controlled funds could tarnish the protocol’s reputation and erode user trust.
The lite PSM serves as a pivotal mechanism for Sky to uphold the peg of its stablecoin to the US dollar by facilitating exchanges between the stablecoin and USDC at a fixed rate.
As part of the migration plan, Sky intends to transfer reserves from the older PSM to the lite PSM in three phases, with an initial $20 million already relocated.
Despite assurances from Sky co-founder, Rune Christensen, that the private keys necessary to access the funds were destroyed during the setup phase with Coinbase Custody, concerns linger about the accountability and security of the EOA-managed reserves.
While Christensen’s explanation alleviates worries about compromised private keys, unanswered questions remain about the ultimate control of the wallet, authorization of transactions, and governance oversight of fund management decisions.
Critics of EOA-based custodianship highlight the inherent risks associated with these wallets, lacking advanced security features like multisignature authentication or time-locked transfers, which could leave the $756 million reserve vulnerable to malicious actions.
Christensen’s proposal to halt token emissions and reduce the protocol’s total supply aims to implement a deflationary model through systematic burning mechanisms. However, uncertainties persist over how governance decisions will impact fund management and enforce security measures.
Despite ongoing discussions and efforts to address concerns, the spotlight remains on Sky’s fund management practices and the need for robust security measures to safeguard the substantial reserves entrusted to the protocol.
