As a logical next step to the product revamping initiative, the following post will touch on a series of considerations done regarding the revamp of the DEFI index, its Methodology and resulting allocation.
A recap of the following considerations is reported on the DEFI Index prospectus, while additional details on the asset selection/allocation can be explored on this working spreadsheet.
First, a slightly new and refined methodology was proposed to select the assets to be listed in the index. While the main driving factor remains protocols’ market capitalization, this time an initial protocol categorization was implemented, followed by further considerations regarding asset liquidity and relative category weight.
Protocols were categorized based on their functionality, namely: DEXes, lending, asset management, derivatives, CDP, Infrastructure, Bridges & NFT DEXes.
After initial mapping into the aforementioned clusters, a first list of indexable tokens was drawn by selecting protocols counting for at least 20% of the market capitalization of their relative category, and/or 1% of the market capitalization of the entire DeFi ecosystem.
Given that a number of categories significantly outweigh the market capitalization (i.e. dexes) of minor ones, a further constraint was introduced to limit the amount of assets per category in the index to 4. This to avoid some categories to be over represented with respect to others.
After the initial filtering driven by clustering and market capitalization, shortlisted protocols were analyzed based on a number of ad-hoc criteria developed by the team, in order to ensure a sound and consistent asset selection. These criteria are presented and described in the table below.
As for the maximum and minimum allocations that tokens can have in the index, these figures were capped at 10% and 1% respectively. In other words, no asset can count for more than 10% of the entire index allocation, as well as no asset can hold below 1% of the index allocation.
The rationale behind the choice of these specific figures is aligned with the initial protocol categorization. In order to avoid certain assets to be over-represented in the index (given their much larger than average market capitalization), their maximum index allocation was capped at 10%.
Furthermore, each asset resulting allocation is validated or iteratively adjusted in function of its available liquidity on DEXes, in order to ensure that the slippage incurred while minting $1m worth of DEFI index would not exceed the 3% threshold for each single asset.
Eventually, 17 assets were shortlisted and met all the mentioned criteria, translating in an index allocation distributed as per chart below:
Given that DEFI aims at being the most representative and inclusive index in the space, leveraging composability the index will also farm all the assets in the index which are farmable in either their native staking protocols or in low risk farms where principal is not put at risk.
Tokens that do not count on native staking could be either lent out on lending protocols as Aave and Compound, or placed into aggregator vaults as Yearn. Moreover, a few assets - CRV and BAL - follow yielding strategies that render them underlying assets of specific derivative products. Such products are deemed acceptable following the rationale below.
CRV will be converted into cvxCRV and staked into Convex which accrues fees from Curve, Convex and the 3CRV metapool. While on one side we do realize that CRV and cvxCRV are not exactly the same asset, we also recognize that cvxCRV provides a liquid alternative to veCRV that accrues value while being tradeable, and still providing exposure to the Curve ecosystem.
In the case of Balancer, BAL tokens will be pooled in the 80BAL/20WETH to obtain veBAL tokens which are then converted to auraBAL tokens for staking, which grant the maximum available boost. While we do recognize that this will diversify 20% of the BAL exposure to WETH, we also consider auraBAL to be a good proxy for the BAL ecosystem that is also able to accrue value.
As shown in the table below, as per current market conditions the weighted yield from all strategies proposed for this new DEFI index allocation would combine into a staggering 17% APY!
|Project||Allocation||Yielding strategy||Current yield||Productivity|
|Looks Rare||2.50%||Looks Rare||70.00%||1.75%|
The proposed rebalancing process is triggered when either:
1. Max allocation of largest holding > 20% for 7 consecutive days
2. Max cumulative allocation of top 3 holdings > 50% for 7 consecutive days
Additional rebalancing policies cover:
- To avoid obsolescence, a minimum of 1 rebalancing per quarter should take place
- A maximum of 1 rebalancing per calendar month should be deemed as acceptable
- The sole inclusion of new underlying assets won’t trigger per se a rebalancing, whose inclusion will be considered during the first available rebalancing.