Sky's Lending SubDAO Spark aims to directly invest in Ethena's USDe and SUSDe tokens, with an investment amount of up to 1.1 billion USD.

According to The Block, Spark Protocol, the lending sub-DAO within the Sky ecosystem, is allocating up to $1.1 billion worth of Spark liquidity layer assets to Ethena’s USDe and sUSDe tokens. The team estimates that under “favorable market conditions,” it could earn an annual yield (APY) of roughly 27% to help drive Sky’s revenue and maximize returns for Savings USDS depositors.

On Tuesday, Sky (formerly MakerDAO)’s subsidiary Spark Protocol announced that it is integrating Ethena’s synthetic dollar USDe into its “liquidity layer.” As part of the collaboration, Spark plans to allocate up to $1.1 billion in assets to Ethena’s yield-bearing tokens to enhance “capital efficiency.”

USDe was launched in early 2024 and is unique in the stablecoin space because it maintains its peg to the dollar through algorithmic-based trading. The rise of USDe has made it the fourth-largest stablecoin, partly because, like other on-chain stablecoin products, it pays users yields for holding it, rather than relying on enterprise-backed assets like Tether.

Before this latest move, Spark liquidity layer assets were limited to Circle’s stablecoins and Sky’s and sUSDS tokens. Spark estimates that by directly adding Ethena’s USDe and sUSDe tokens to its portfolio, it can achieve an annual yield of about 27% under “favorable market conditions.”

“Ethena’s inclusion demonstrates Spark’s commitment to innovation and scalability,” the Spark team wrote in a blog post. “By enhancing liquidity management and revenue generation, Spark solidifies its vision of becoming a DeFi yield engine.”

The team said this is Spark’s first step on its liquidity layer, aiming to make it easier for other DeFi protocols to access Sky’s yield stablecoin Savings USDS through a multi-chain system.

“By incorporating Ethena’s USDe and sUSDe into its assets, Spark adds a major yield opportunity to its infrastructure, positioning it to maximize returns for Savings USDS depositors and the Spark ecosystem,” the Spark team said.

The Spark liquidity layer manages $6.2 billion in stablecoin liquidity, enabling users to convert Circle’s USDC stablecoin into Sky’s USDS or the yield stablecoin “Savings USDS” (sUSDS) on the supported network of their choice. The stable interest rate for Savings USDS is determined by Sky’s governance DAO and is currently around 12.5%, supported by Sky’s revenue sources, including over-collateralized DeFi loans and real-world investments.

USDS is currently the third-largest stablecoin by market capitalization and is fully redeemable for MakerDAO’s original dollar-pegged token DAI, which has fallen to the fifth-largest stablecoin.

Since March, Spark has gained exposure to Ethena’s USDe and sUSDe tokens through its over-collateralized Morpho vaults. In December last year, the protocol’s DAO considered adjusting its risk exposure to this network.

“Taking into account Ethena’s significant growth over the past few months, with USDe supply now exceeding USDS, we recommend adopting a stricter total exposure threshold—i.e., 20% of USDe supply,” the team noted, which is roughly equivalent to $1.05 billion in USDS.

Meanwhile, Ethena claims it contributes approximately $120 million in annual revenue to the Sky ecosystem. In December last year, Ethena submitted a bid to include its new USDtb stablecoin in Spark’s $1 billion tokenization prize pool, an initiative intended to bring real-world assets into DeFi by providing funding to selected participants. The USDtb token was ultimately backed by U.S. government bonds via BlackRock’s BUIDL fund.

Spark was spun off from MakerDAO as part of founder Rune Christensen’s “Endgame” plan. The plan aims to improve ecosystem returns by launching semi-autonomous “sub-DAOs,” which function like startups. Since its launch, Spark’s money market has contributed approximately $232 million in annual revenue to the Sky ecosystem.