Sky watchers quietly got a much-needed update on the intended capital structure at Sky, and the seniority of different parties in the event of insolvency. For a given Star X, losses flow thusly (first loss at top of the list): Star X (fully liquidated) ⬇️ SKY (dilution) ⬇️ Stars Y, Z, etc (clawback of funds) ⬇️ USDS/DAI holders Notably, if SKY is diluted to $0 and the sibling Stars or stablecoin holders bear the final losses, a new supply of gov tokens is supposed to be airdropped to those stakeholders. I like this in principle, although it’s not clear what enforces the wipeout of SKY and handing the keys to creditors. This confirms my earlier intuition that Stars are exposed to the risks of their peers. What I would not have guessed, however, is positioning SKY as junior to solvent Stars. Given how Sky has consolidated the accounting of Stars to date - indicating they view 100% of those assets as owned by the parent entity - I would have presumed SKY would serve as the “preferred” and uppermost equity-like layer. This is good news for Star tokenholders and bad news for SKY tokenholders. Because of this, we need to keep an eye out for future details on enforcement of this seniority hierarchy now that it has been communicated. None of these steps happen automatically, so you’re trusting SKY holders will indeed zero themselves out and transition control of the protocol to either the surviving Stars or USDS/DAI holders. It’s also worth noting that solvent Stars don’t escape problems even if SKY is being diluted. Remember that large portions of each Star’s token must be given to Sky, which then can use it to finance expenditures or yield to stakers. This means that a solvent Star may very well have its token crash as Sky governance attempts to fill any holes from insolvent Stars. As a data point, 58% of SPK sits in the Sky treasury today. I think I understand the reasoning behind this ordering, but a lot depends on Sky governance exercising very tight risk controls over Stars (like a bank regulator over banks) since the incentive is for Stars - whose teams generally are not putting their own capital at risk - to maximize gains since their own losses are mostly limited to being unemployed. Historically, risk controls have been very loose except in the very narrow sense (underwriting a specific asset), with self-dealing consistently tolerated at both the Sky and Star levels. Assuming this forum post translates into updating the Atlas, this provides a lot of clarity (although we still need to hear about enforcement mechanisms, either legally or technically). Given the somewhat surprising ordering of the “loss waterfall” @SPGlobalRatings probably needs to review their rating (I’m not sure if it would improve or weaken the current deep-junk B- rating).