Appendix A: Protocol Features

Exhaustive list of Sky Core mechanisms. Together with Appendix B (Agent Primitives), this provides complete coverage of every mechanism in Sky Ecosystem.

Core Tokens

SKY

The community governance token for Sky Ecosystem.

Functions:

• Governance voting power (when staked)
• Staking rewards recipient (SSTR)
• Collateral for SKY-backed borrowing
• Deflationary via Smart Burn Engine buyback/burn

Supply Dynamics:

• ~14% of original MKR supply remains unclaimed post-migration
• 1% quarterly burn of SKY backing unclaimed MKR (~24 year burn schedule)
• Continuous buyback/burn from protocol surplus via Smart Burn Engine

USDS

The primary stablecoin of Sky Ecosystem.

Key Characteristics:

• 1:1 convertible with DAI (upgrade path)
• Can be deposited to receive sUSDS (yield-bearing)
• Freely transferable and composable with DeFi protocols
• Available on Ethereum mainnet + L2s/L1s via SkyLink
• Decentralized yield-generating stablecoin focused on capital formation (not a payment stablecoin)

sUSDS

The savings token representing USDS deposits earning the Sky Savings Rate.

How It Works:

1. User deposits USDS into savings contract
2. User receives sUSDS tokens at current exchange rate
3. Exchange rate increases over time as yield accrues
4. User redeems sUSDS for increased amount of USDS

stUSDS

Segregated junior risk capital token for SKY-backed borrowing.

Risk Isolation Model:

• Protocol isolated from SKY collateral losses
• stUSDS holders explicitly accept downside risk
• Losses absorbed by stUSDS before any impact to main protocol
• Higher yield compensates for additional risk

Dynamic Debt Ceiling:

Max SKY-Backed Debt = Total USDS in stUSDS Contract

• No manual ceiling adjustments needed
• Ceiling scales automatically with stUSDS deposits
• Market-driven capacity limits

srUSDS (Planned)

Senior risk capital token providing global backing for all USDS.

Mechanics:

• Users deposit USDS to deposit queue → converts to srUSDS at settlement
• Users add srUSDS to redemption queue → converts back to USDS at settlement
• Queue entries can be withdrawn before the daily settlement lock window
• Conversion rate updated at each settlement based on pool performance

SKY Token System

SKY Staking

Stake SKY to earn staking rewards (SSTR) and participate in governance.

Staking Flow:

1. User stakes SKY
2. Receives staking rewards (SSTR) from TMF Step 5
3. Can delegate voting power to Aligned Delegates
4. Can use staked SKY as collateral for USDS borrowing

SKY-Backed Borrowing

Use staked SKY as collateral to borrow USDS while continuing to earn staking rewards.

Key Benefits:

• Continue earning staking rewards while borrowing
• Lower effective borrowing cost due to reward offset
• No sacrifice of governance participation
• Market-driven capacity via stUSDS deposits

SKY Voting Delegation (Legacy)

Note: The Aligned Delegate system has been absorbed into Core Guardians as part of the alignment conserver consolidation. See governance-transition/guardian-rename.md. The delegation mechanism below is retained for historical reference.

Delegate voting power to Alignment Conservers while retaining token custody.

Alignment Conservers (formerly Aligned Delegates):

• Anonymous Alignment Conservers receiving delegated voting power
• Ranked by delegated voting power (L1, L2, L3)
• Subject to strict operational security and accountability requirements
• Receive budget allocations tied to voting activity

Smart Burn Engine

Algorithmic SKY buyback using protocol surplus.

Current Behavior (Temporary):

• Steps 4 and 5 are currently unified
• All funds from both steps used to buyback SKY
• All purchased SKY distributed to stakers as yield

Planned: Dynamic Burn Rate Formula

Burn Rate = (1 - MC / TMC) × 50%

Where:

• MC = Current Market Capitalization
• TMC = 8.5 + (200 × growth_rate) × annual_profits
• Buys more when price is low, retains capital when high

Since February 2025:

• $92.2 million in SKY repurchased
• ~6.3% of total supply

Savings & Yield

Sky Savings Rate (SSR)

Base yield rate for sUSDS holders.

Rate Setting:

• Current: Governance process with risk advisor inputs
• Post-Laniakea: Algorithmic based on USDS price and ASC balance

See Monetary Policy for full details.

Staking Rewards (SSTR)

Yield distributed to SKY stakers from TMF Step 5.

Current Phase (Genesis):

• Primary destination for protocol surplus
• Majority of net revenue flows to staking rewards
• As revenue scales, more flows to burn and fortification

stUSDS Yield

Higher yield than sUSDS compensating for haircut risk in SKY-backed borrowing.

srUSDS Yield (Planned)

Senior risk capital yield with lower risk profile than junior capital.

Risk Capital System

stUSDS (Junior Risk Capital)

Segregated pool backing SKY-backed borrowing; first-loss position for SKY collateral risk.

srUSDS (Senior Risk Capital) — Planned

Global senior risk capital for all USDS; LCTS-based with queue settlement.

Loss Absorption Waterfall

Defined sequence for absorbing losses, structured in three tiers.

Loss Event
    ↓
┌─── PRIME-LEVEL (per-Prime) ─────────────────────────────────────┐
│  1. First Loss Capital (10%)   │  ← Prime's IJRC absorbs first  │
├────────────────────────────────┤                                │
│  2. Remaining JRC (pro-rata)   │  ← IJRC + EJRC proportionally  │
├────────────────────────────────┤                                │
│  3. Agent Token Inflation      │  ← Dilute Prime token holders  │
└─────────────────────────────────────────────────────────────────┘
                              ↓
┌─── SYSTEM-LEVEL (shared across all Primes) ─────────────────────┐
│  4. SRC Pool (pari passu)      │  ← TISRC + Global SRC combined │
├────────────────────────────────┤                                │
│  5. SKY Token Inflation        │  ← Dilute protocol token       │
└─────────────────────────────────────────────────────────────────┘
                              ↓
┌─── NUCLEAR OPTIONS (protocol reserves / peg) ───────────────────┐
│  6. Genesis Capital Haircut    │  ← Protocol reserves           │
├────────────────────────────────┤                                │
│  7. USDS Peg Adjustment        │  ← Final backstop              │
└─────────────────────────────────────────────────────────────────┘

First Loss Capital (FLC):

• First 10% of total JRC absorbed solely by Prime's own capital (IJRC)
• Ensures Prime has direct skin in the game for initial losses
• Losses beyond FLC allocated pro-rata across remaining JRC (internal + external)

SRC Pool (pari passu):

• When a Prime's losses exhaust steps 1-3, its TISRC merges into the Global SRC pool
• Losses are shared proportionally across all SRC holders in the combined pool
• Sky charges a fee on TISRC yield for this pari passu protection

Token Inflation Layers:

• Agent Token Inflation (step 3) dilutes the specific Prime's token holders
• SKY Token Inflation (step 5) dilutes protocol-level token holders
• Both can theoretically cover unlimited losses through dilution

Nuclear Options:

• Steps 6-7 should never be reached under normal conditions
• Genesis Capital is the protocol's reserve fund
• Peg Adjustment is the absolute last resort, affecting all USDS holders

Governance Infrastructure

Sky Atlas

Human-readable governance constitution defining principles, structure, and agent type definitions.

Document Hierarchy:

1. Immutable Documents: Scopes, Articles, Sections (locked at Endgame)
2. Primary Documents: Core documents, Active Data Controllers, Budget Controllers
3. Supporting Documents: Active Data, Budgets, Precedents
4. Accessory Documents: Translations, Archives

Core Principle: Spirit of the Atlas

• All rules have underlying intent to serve human values and Universal Alignment
• Facilitators interpret Spirit when explicit guidance is absent
• Balance between "letter of the rule" and true purpose

Sky Synome

The Synome begins as a machine-readable operational database containing all parameters, artifacts, and transaction logs. Over time, it evolves into the cognitive architecture that encompasses the entire Sky ecosystem — much as "Ethereum" refers not just to the blockchain but to the community, tooling, and coordinated intelligence around it. In its mature form, the Synome is the living, self-improving structure through which autonomous agents (teleonomes) accumulate knowledge, coordinate action through beacons, and operate Sky's institutional shells (Synomic Agents). See synomics/synome-overview.md for the full architectural vision.

Five-Layer Architecture (Speculative)

The mature Synome is organized as a five-layer containment hierarchy:

Each layer contains the layers below it. Intelligence lives privately at Layers 3–5; power enters the world only through regulated apertures (beacons) registered at Layer 2.

Dual Architecture

The Synome's knowledge model combines two complementary structures:

• Deontic skeleton — Hard, sparse rules derived from Atlas and Agent Directives. Binary truth values (1,1): either binding or not. Forms the constitutional backbone.
• Probabilistic mesh — Soft, dense knowledge connections with (strength, confidence) truth values. Evidence accumulates; high-confidence patterns may crystallize into deontic rules through governance.

This dual architecture separates what the system must do (deontic) from what it knows (probabilistic). The crystallization interface — the governance boundary where probabilistic evidence is deliberated and converted into deontic commitments, or where deontic rules are softened back to probabilistic status for re-evaluation — bridges the two. See synomics/synodoxics/probabilistic-mesh.md for the full epistemological framework.

Long-term, the Synome supports neuro-symbolic cognition: attention allocation, live graph context, and cognitive manipulation loops that enable autonomous agents to reason over the knowledge graph in real time. See synomics/neurosymbolic/ for the cognition model and synomics/synoteleonomics/ for the design theory of teleonomes — autonomous goal-directed entities that operate Synomic Agents through beacons.

Governance Polls

SKY holder signaling votes; non-binding.

Executive Votes

On-chain parameter changes; binding.

Process:

1. Governance Point prepares Executive Sheet and Document
2. Spell Team crafts and reviews smart contract
3. Fork testing on mainnet fork
4. Publication to Voting Portal (vote.sky.money)
5. SKY holders vote; winning proposal executes

Spells

Smart contracts that execute governance decisions on-chain.

Current Behavior: Spells perform all types of protocol actions — parameter changes, contract deployments, role assignments, and cross-chain bridge configuration.

Post-Laniakea Behavior:

• Spells primarily trigger Prime Spells or configure cross-chain bridges
• Direct protocol modifications become rare as Laniakea factory standardizes operations
• See Appendix B for Agent Spells (Prime Spells, Halo Spells)

Governance Evolution: The Executive Vote model described above is the current mechanism. Post-transition, spell triggering moves to a Core Council Guardian vote model (SpellCore) where 16 of 24 Core Council Guardians must vote a spell into the hat position. SKY holders retain ultimate sovereignty through a graduated freeze/override mechanism — a tiny minority can freeze for hours, a larger minority for days, and a full quorum triggers override (dismissing the entire Core Council and reverting to direct SKY holder control). See governance-transition/spellguard-system.md for full SpellGuard architecture.

Aligned Delegate System

Ranked delegates (L1-L3) with compensation tied to governance activity.

Misalignment Handling:

• First mild breach: Warning, no substantial penalty
• Second breach or severe first breach: Immediate derecognition
• Derecognition permanently removes individual from AC role

Guardian Interpretation Framework

Core Guardians interpret Atlas and Artifacts directly — absorbing the former Facilitator role with collateral-backed accountability.

Atlas Edit Cycle

Process for modifying Atlas documents through governance.

Revenue & Treasury

Treasury Management Function (TMF)

5-step sequential waterfall distributing all protocol net revenue.

Key Property: Each step calculates allocation based on what remains after previous step (sequential waterfall).

Temporary Behavior: Steps 4 and 5 are currently unified — all funds from both steps are used to buyback SKY and distribute to stakers.

Aggregate Backstop Capital

Solvency buffer for bad debt protection.

Phases:

• Phase 1 (Safety Floor): Buffer < 125M → MAX(25%, calculated rate) floor
• Phase 2 (Filling): 125M ≤ Buffer < Target → Calculated rate
• Phase 3 (Full): Buffer ≥ Target → 0% allocation

Fortification Conserver

Alignment Conserver for legal defense and unquantifiable risk.

Staking Rewards Distribution

100% of TMF remainder after Steps 1-4; primary destination during Genesis Phase.

Monetary Policy

Sky Savings Rate (SSR)

Base yield rate for sUSDS holders.

Current Behavior: SSR is set through governance process with inputs from risk advisors. Rate adjustments consider market conditions, protocol revenue, and competitive positioning.

Post-Laniakea Behavior: SSR will be algorithmically determined based on:

• USDS Price — Rate adjusts to maintain peg stability
• Actively Stabilizing Collateral (ASC) — Available ALM liquidity supporting the peg (see ## Peg Stability)

This removes governance overhead and enables real-time rate optimization.

Base Rate

Protocol-wide stability fee applied to all borrowing.

Sky Borrow Rate

Rate for borrowing USDS against SKY collateral.

Formula:

SKY Borrow Rate = SKY Borrow Base Rate
                + Slope1 × min(Utilization, Target Utilization)
                + Slope2 × max(0, Utilization - Target Utilization)

Peg Stability

LitePSM

USDC ↔ USDS 1:1 conversion; primary peg stability mechanism.

Actively Stabilizing Collateral (ASC) and Demand Absorption Buffer (DAB)

ASC and DAB are the Asset Liability Management (ALM) liquidity layers that keep USDS close to $1 through market-making:

• ASC: highly liquid, non‑USDS assets that can be used to buy USDS during downward peg pressure (buy support).
• DAB: highly liquid USDS (or USDS-equivalent) positions that can be used to sell USDS during upward peg pressure (sell support).

Resting vs. latent ASC

• Resting ASC provides immediate buy support near the peg (e.g., USDC in LitePSM/PSMs; stablecoin liquidity paired with USDS).
• Latent ASC can be converted into resting ASC on short notice (targeted within ~15 minutes); latent ASC is capped (e.g., max 25% of total ASC).

Minimum requirements (parameterized)

• Minimum ASC: defined as a percentage of the total Sky Collateral Portfolio (e.g., 5% in current implementations).
• Minimum DAB: defined relative to ASC (e.g., DAB sized at 25% of the required ASC), with an allowed upside spread (e.g., selling up to 1.001 USD per USDS).

Peg defense event

• Trigger: the average USDS price on designated DEX venues falls below a downside threshold (e.g., 0.999).
• Obligation: purchase USDS at a rate defined as a fraction of the ASC requirement on a fixed cadence (e.g., 6.25% of the ASC requirement every 6 hours) until the event clears.

Prime Agents are required to maintain ASC and DAB proportional to the capital they deploy from the Sky Collateral Portfolio, and the system can support rentals that transfer ASC/DAB obligations together between Primes.

More detail: risk-framework/asc.md.

Multi-Chain

SkyLink

Native token bridging to L2s and major L1s.

Capabilities:

• Native token transfers
• Native savings rates (sUSDS earning SSR)
• Native token rewards distribution
• Native 1:1 USDC ↔ USDS conversion

Native Savings Rates

sUSDS earning SSR on all supported chains.

Cross-Chain USDC Conversion

1:1 USDC ↔ USDS on all supported chains.

Settlement & Operations

Monthly Settlement Cycle

Current settlement cadence for risk capital and distributions.

What Gets Settled:

1. Net Revenue Calculation → TMF waterfall
2. Senior Risk Capital Origination → clearing price, costs, OSRC credited
3. srUSDS Conversions → queued deposits/redemptions processed
4. Smart Burn Operation → burn rate calculated and executed
5. GovOps Functions → payments, compliance, penalties

Daily Settlement Cycle (Planned)

Post-Laniakea: daily processing window (lock 13:00 → settle 16:00 UTC); faster capital reallocation.

Status: Draft

OSRC Auction (Planned)

Sealed-bid auction for Senior Risk Capital capacity allocation.

Activation: Begins once Prime-side stl-base is deployed. Prior to that, OSRC allocations are governance-set and published top-down (pre-auction).

Duration Bucket Auction (Planned)

Capacity reservations for duration-matched asset deployment.

Activation: Begins once Prime-side stl-base is deployed. Prior to that, duration capacity is allocated manually by governance (top-down).

Compliance

Geographic Filtering

IP-based blocking/hiding for restricted jurisdictions.

Legacy Systems

DAI

Original stablecoin; 1:1 convertible with USDS.

MKR

Original governance token; 1:24,000 convertible with SKY.

DSR

DAI Savings Rate; predecessor to SSR.

Legacy Vaults

Original collateralized debt positions.

PSM (Legacy)

Original peg stability modules.

This appendix should be updated as new features are deployed or deprecated.