DeFi Pulse Index Monthly Update - February 2021
$DPI outperforms ETH, still ahead of BTC and ETH over the last 3 months.
February was a mixed bag for the crypto markets, but the DeFi sector still generated positive returns for investors. Some uncertainty in global markets, seemingly sparked by the increase in U.S long-dated bond yields, saw a risk-off move across the board in the latter half of the month. Crypto was not immune, with Bitcoin and Ethereum both losing around 30% in just 7 days. Despite the volatility, DPI made it through the month with an 18.4% gain, outperforming ETH. Over the last three months, DPI outperformed BTC and ETH by about 128% and 126%, respectively.
Looking at other performance metrics, the upside and downside capture ratios have continued to improve over the last month. DPI showed considerable resilience during the most recent sell-off, outperforming ETH and registering the first month of positive net capture in relation to ETH. Positive net capture refers to the performance pattern where an asset captures more of the upside than the downside. For example, since its inception, DPI captured 86% of the upside of ETH and 82.6% of its downside, resulting in the net capture of 3.4%. For the uninitiated, upside capture indicates, on average, how much of a price move up or down is captured by the token you are interested in. For example in the table below, DPI is shown to move up $0.719 for every $1 of BTC price gain.
Turning our attention to the underlying tokens, UNI and AAVE were the top contributors to the DPI performance in February. In terms of absolute performance, MKR, REN and BAL recorded substantial gains while mStable, in its first month of DPI inclusion, was the only detractor.
DPI Performance Contributors
UNI: UNI was the top contributor in February, perhaps buoyed by the continued speculation regarding Coinbase's IPO as market participants considered relative valuation. At one point, UNI reached $33.50 per token and ended the month up 25.6%.
The protocol also hit a significant milestone halfway through February, having processed $100b in volume since inception. Around the same time, Bitwise opened the doors to their DeFi index fund, which saw $32.5m of inflows in the first two weeks, having Uniswap (and of course AAVE) as the top two projects by weight, at around 25% each. This, coupled with the looming V3 release, rounded up another strong month for UNI, which contributed approximately 6.2% to DPI's monthly performance.
AAVE: While Aave shared the tailwind of being included in the Bitwise fund, the protocol also stood strong on its own, passing $5b in liquidity during February. Consequently, it saw almost $6m of interest revenue and $2m of fees generated by flash loans. While a 17.3% gain wasn't the best in terms of absolute performance, the large weight of AAVE within the DPI meant that the token was the second-highest performance contributor at approximately 3.9%.
In terms of technical updates, Aave announced a partnership with Balancer aimed at increasing capital efficiency through a hybrid liquidity and lending model. Balancer's V2 update means assets are now held in a single protocol vault, resulting in greater pool depth and an opportunity to lend out a large portion of previously idle assets. This is a great example of composability in DeFi. However, it specifically benefits Aave as the protocol will now have even greater TVL due to assets flowing across from Balancer. More deposits means more attractive rates for borrowers and, potentially, increased revenue for the protocol.
Performance Detractor
mStable
In its first month of inclusion, mStable detracted -0.1% from DPI performance, the impact being minimised by its small index weighting. It's worth mentioning that the team have just rolled out their second product, a meta Bitcoin token (mBTC). There's also a raft of updates on the horizon, including protocol changes that will boost yields for Save products and a proposed change to MTA tokenomics, incorporating the buy-back and make model.
The protocol itself continues to show signs of growth, with mUSD supply reaching $47m and the associated Save vault seeing some of the highest stable coin yields in DeFi hovering around 15-20%. With mETH and mEUR products also on the way, perhaps mStable can turn things around from here.
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