DeFi (decentralised finance) is taking the world by storm and rapidly challenging the established ecosystem. In December 2021, recognising the immense opportunity for growth and innovation in the DeFi space, we shared our vision with clients by providing them with an overview of the DeFi landscape and further insights into the forces disrupting the global financial system. Many of our clients were enlightened by this bullish outlook and wanted to capitalise on the growth. In response, we launched the Zerocap DeFi Index which sought to provide clients with exposure to the rapidly evolving DeFi space.
The DeFi Index provides clients with direct access points into the DeFi space through token investments in the most promising DeFi projects around. These tokens provide utility in the DeFi ecosystem, and hold value based on their function, usage and future potential in the space. Like holding equity in a business, these tokens can appreciate with the success of the project. We have strategically diversified clients’ token holdings by allocating across a number of key verticals in the DeFi space — including but not limited to; DEXs, Money Markets and Stablecoin Infrastructure.
The tokens are market cap weighted within the index, providing exposure to the industry, with Zerocap’s discretion to change key holdings and weightings based on macro and micro factors on a quarterly basis.
- Strong performance, reporting a 26.1% monthly return in August and a 283.4% return year-to-date.
- The best performing protocol in the Zerocap DeFi Index was Alpha Finance Lab (ALPHA — see below) which rewarded token holders with a 92.8% monthly return.
- Protocol Tokens that act as ‘cross-chain solutions’ outperformed.
- The DeFi Index continues to outperform benchmarks.
- Note that this portfolio is volatile by its very nature — these are early stage, disruptive startups and scale-ups. In April and June alone, we saw an aggregate drawdown of 57.2%.
Solid Overall Performance:
Most months this year have seen heavy growth in the DeFi space. Investors with a high tolerance for volatility have been rewarded.
It has also been pleasing to see our product outperform its benchmarks so far (see graph below). While we anticipated that DeFi token returns would dwarf that of the S&P 500, we were pleasantly surprised by the extent that our DeFi Index outperformed bitcoin.
We were pleased to learn that our product has beaten the DeFi Pulse Index so far this year. We attribute this success to our expertise in the landscape which has allowed us to formulate an optimal investment strategy. This strategy entails:
The Zerocap DeFi Index outperformance in August can be attributed to the success of all key verticals in the DeFi space last month. Let’s unpack some specific highlights.
Stellar month for ALPHA:
What does ALPHA do?
Alpha Finance Lab is touted as being the first DeFi protocol to offer leveraged yield farming services. Their Alpha Homora V2 product allows integration with Automated Market Making protocols (AMMs — such as Uniswap and Sushiswap) which adds leveraged functionality for users who wish to provide support to AMM liquidity pools.
There is no doubt that a 31.3% rise in ETH provided a strong tailwind for ALPHA tokens during August (as governance token returns are historically correlated with the returns of their network’s native token). However, ALPHA’s strong monthly return 92.8% was largely on the back of the protocol launching their first incubated project — Beta Finance.
Beta Finance will bring short-selling tools to the crypto-space, offsetting volatility and improving stability in the market. The Beta project involves borrowing tokens for users who wish to take short positions. On the other side of this trade, token holders can facilitate shorting the market by lending to Beta, generating a high APY in return.
The Beta project should present an attractive opportunity for holders of the ALPHA governance token. Whilst leveraged yield farming would typically welter during market dumps, the funds generated from shorted positions should assist in protecting the protocol from systemic downside. Further, overly inflated crypto prices in DeFi will be moderated by Beta’s short positions creating more stability in the market. This greater stability could increase the adoption of ALPHA’s leveraged investment products (Investors are more inclined to take on greater risks in stable markets).
Cross-chain solutions as another hot area:
For our model portfolio, cross-chain solutions stood out as the hottest DeFi vertical for the month. The tokens in this category increased by 56.32% collectively.
Why is cross-chain doing so well
Those engaging in transactions on the Ethereum blockchain are being increasingly punished by heavy congestion and overwhelming gas fees. While this is less of a problem for whales, the smaller fish on Ethereum’s blockchain are struggling to keep up with the tide. Those who wish to engage in DeFi but cannot afford Ethereum’s high fees have no choice but to explore other networks (such as Polkadot and Avalanche where the fees are far cheaper).
Cross-chain solutions act as a bridge to these cheaper networks, allowing users to move their assets across networks. The high gas fees on Ethereum, which have bolstered cross-chain activity, are therefore a massive protagonist for the outperformance of these protocols.
As cross-chain solutions become more frictionless and secure, we will likely see a sharp uptake in the usage of competing networks to Ethereum. Our DOT staking product is already capturing some of this growth.
If the alternative blockchain solutions continue to thrive, there will be heavy uptake in the amount of assets being transferred across different networks. In this environment, capital inflows will likely increase for cross-chain protocols.
One should consider that the DeFi Index’s attractive results come with heavier volatility. Our selection criteria was devised to aid those who are willing to look past the short-term market fluctuations. It positions clients across the varying types of market players and verticals to maximise diversified thematic exposure.
Invest in the Zerocap DeFi Index
Composed with the most promising DeFi protocols in the market, the Zerocap DeFi Index provides clients with a diverse selection of useful projects in the DeFi industry, seeking thematic growth with market-cap-weighted exposure.
Zerocap is a crypto asset investment platform for private clients, family offices and institutional investors. We provide unique investment products and custody to forward-thinking investors and institutions globally.
If you would like to become a client of Zerocap sign up to our platform. To learn more about our platform and the investment opportunities available, contact us at [email protected] or visit our website www.zerocap.com.
Originally published at https://zerocap.com on September 21, 2021.