Introduction
The Methodology PDF can be found here
TLDR:
- IndexCoop.com “DPI” has over $400m AuM and has proven popular as an easy way to get exposure to DeFi assets. However, it’s not wholly collateralized and does not escape the legal definition of a managed investment scheme.
- WSB has an opportunity to build a better DeFi ETP.
- The quarterly Rebalancing of this ETP would, however, not be possible by WSB token holders. The reason for this is that it comes with a partnership and an existing perpetual swap contract that tracks an existing DeFi index. The Rebalancing on the ETP would need to mirror the rebalancing of the Index, to keep in place the distinct advantages of having an ETP where a derivative also exists. This increases WSB’s ability to list the WSB DeFi ETP on centralized exchanges for rapid growth.
- All fees generated by the proposed “WSB DeFi ETP” would flow to $WSB holders.
- This post is to open a discussion period, followed by a Snapshot on-chain vote.
Background:
Bravenewcoin.com has an adopted index: The ‘BNC Blue-Chip DeFi’ index.
WSB has an opportunity to partner with BNC to create a WSB DeFi ETP with ‘exposure parity’ to the Index.
The Assets in this index are both available and liquid on Balancer V2 - this is a prerequisite to manufacturing an ETP and the reason we propose a discussion and vote on the WSB DeFi ETP instead. The WSB Crypto 20 ETP still does not have all 20 assets liquid enough on Balancer V2 and the WSB team wishes to progress with rolling out ETP’s now that the 1st Macro Hedge one has soft-launched and all the ground work is done.
Analysis:
In this analysis we compare an Exchange Traded Portfolio (ETP) against a benchmark index. The ETP is analogous to the BNC Blue-Chip DeFi Index (BBDX) and therefore, pricing and returns data have been used from this index.
The ETP is essentially a subsection of assets in the crypto markets. These assets represent protocols that are building Decentralized Applications and are all ERC-20 based tokens, whereas the benchmark used is the underlying asset that fuels power to the blockchain that these assets reside (Ethereum).
The assets in the ETP represent the sectors of Decentralized exchanges (UNI and SUSHI), Borrowing and Lending protocols (COMP, AAVE and MKR), Derivatives & Synthetic Assets (SNX), Asset Management (YFI) and Data indexing solutions for blockchains (GRT).
This report uses the benchmark shown as a point of comparison between the BBDX in the DeFi Sector Analysis, Historical Returns and Portfolio Statistics sections.
The benchmark used to compare the DeFi ETP is the BNC Ethereum Liquid Index (ELX).
A future analysis will report on the underlying assets of the BBDX individually.
Decentralised Finance (DeFi) Sector Weightings
The Sector Analysis below summarizes the constituent allocation of the BBDX across 5 sub sectors of the DeFi market sector.
| Subsector | Weight % |
|---|---|
| Decentralized Exchanges | 25 |
| Borrowing and Lending | 37.5 |
| Derivatives | 12.5 |
| Data Management | 12.5 |
| Asset Management | 12.5 |
Asset Allocation
Asset allocation is the process of determining what portions of your portfolio holdings are to be invested in the various asset classes. The below table are the allocated assets for the DeFi ETP, based on the same allocation as the BBDX.
| Asset | Weight % |
|---|---|
| UNI | 25.00 |
| AAVE | 21.37 |
| MKR | 13.24 |
| COMP | 10.99 |
| GRT | 10.37 |
| SNX | 6.74 |
| SUSHI | 6.28 |
| YFI | 6.01 |
Performance Comparison
The performance data given represents past performance and should not be considered indicative of future results. Performance data does not include the effects of any applicable trading commissions or short-term trading fees.
For simplicity, this analysis also does not take into account swap, liquidity or rebalancing fees that would accrue as an ETP.
| Trailing Returns | 3 Mo % | 1 Yr % (avg) |
|---|---|---|
| Pre-Tax ETP Return | 247.18 | |
| Benchmark (ELX) Return | 254.14 | |
| +/- Bmark (ELX) Return | -6.96 |
Jan 1, 2021 - Sept 20, 2021
The Trailing Returns table shows the trailing returns of the DeFi ETP over the periods shown. For comparison purposes, the return relative to the benchmark (ELX) is shown as well.
Risk and Return Statistics
| (YTD 2021) | ETP | ELX |
|---|---|---|
| CAGR | 377.40% | 742.41% |
| Risk Free Rate | 0.00% | 0.00% |
| Annualised Volatility | 133.01% | 91.30% |
| Sharpe Ratio | 2.84 | 8.13 |
| Max Drawdown | -65.15% | -64.59% |
Jan 1, 2021 - Sept 20, 2021
The Risk and Return Statistics table shows the pre-tax return, Compound Annual Growth Rate, Annualised Volatility, Maximum Drawdown and Sharpe ratio of the DeFi ETP versus the Benchmark (ELX).
As there isn’t currently a Risk Free Rate in the crypto markets yet, zero percent was used conservatively.
Modern Portfolio Theory Statistics
| (YTD 2021) | ETP |
|---|---|
| PPC* | 0.415 |
| Beta | 0.61 |
| R-squared (R2) | 0.314 |
*Pearson Correlation Coefficient
Jan 1, 2021 - Sept 20, 2021
Beta to ELX
This is a measurement of the BBDX (ETP) average historical price fluctuation relative to the average historical price fluctuation of the ELX.
For example, a Beta to ELX value of 0.5 would imply that historically the BBDX experienced value fluctuations at levels half that of the ELX — or put another way, for every 1% move in the ELX, the BBDX experienced a 0.5% move, on average.
R-squared (R2)
R-squared, also known as the coefficient of determination, is the percentage of an asset or portfolio’s return movements that are explained by movements in its benchmark index, showing the degree of correlation between the asset or portfolio and the benchmark.
This value can be helpful in assessing the probability that beta and alpha are statistically significant. A value of 1 indicates perfect correlation between the asset or portfolio and its benchmark. The lower the R-squared value, the lower the correlation
If the R-squared value 0.3 < r < 0.5 this value is generally considered a weak or low effect size.
*The reweighting impacts trailing return data, as well as statistics that are calculated using return, including standard deviation, Sharpe ratio, Beta and R-squared.
Cumulative Returns
The below chart compares the cumulative returns of the DeFi ETP (BBDX) versus the ELX since January 2021.
Jan 1, 2021 - Sept 20, 2021
Maximum Drawdowns
The below charts show the Maximum Drawdowns (MDD) since January 2021. The MDD is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.
Jan 1, 2021 - Sept 20, 2021
In the traditional markets fixed income instruments such as Bonds can be used to give stability to a portfolio. A 10% allocation to a crypto hedging vehicle such as the Macro Hedge ETP by WSB could provide stability, mitigate some risk and minimize drawdowns.
Benchmark Disclosure
BNC Ethereum Liquid Index (ELX)
The Ethereum Liquid Index (ELX) represents a spot rate for the most liquid end of the Ethereum market. Consistent with IOSCO Principles for Financial Benchmarks, the ELX offers a robust reference rate and settlement price for any derivatives or complex products.
The constituents displayed for this index are from the following data provider and index administrator: Brave New Coin Ltd.
The returns published for this index are trailing returns.
BNC Blue-Chip DeFi Index (BBDX)
The BNC Blue-Chip DeFi Index tracks the real-time market performance of the 8 largest DeFi assets on Ethereum.
The constituents displayed for this index are from the following data provider and index administrator: Brave New Coin Ltd.
The returns published for this index are trailing returns.
Summary:
- We have the opportunity to quickly roll out ETP #2 - a more speculative product which will be named “WSB DeFi ETP”.
- All fees will flow towards benefiting $WSB token holders.
- The deal comes with a partnership with Bravenewcoin.com
- The ETP comes with an opportunity to open dialog to list on centralized exchanges.
- The Rebalancing would be done by BNC each quarter to ensure parity between the index and the ETP.
- The product would launch immediately after the next rebalancing period - 4th of Nov.
Thank you to the WSB community for considering this proposal. We anticipate a snapshot vote will start this Wed or Thurs. If approved, the product will go live around the 4th or 5th of Nov and be available via ETP.WSBDApp.com
The Methodology PDF can be found here
