Is diversification a better investment strategy?

From September 14, 2020: $DPI and sDeFi.

$DPI is an index that tracks 11 governance tokens with 100% collateralized market capitalization and was launched on September 14. After the launch, the DeFi sector experienced an overall decline, resulting in a -47% drop in the price of $DPI. Figure 1 shows the overall trend of $DPI and its components. $MKR performed the best at +2%, and $YFI fell the most at -70%. $UNI Token was launched on September 16, but we adjusted its initial price to September 25 because the initial price did not reflect its value well.

Figure 1: Performance of $DPI and constituent tokens since September 14, 2020

sDeFi is a synthetic fund created by Synthetix. As a synthetic product, it does not hold any tracked tokens as collateral. The fund is based on constant weights of selected tokens determined by Synthetix governance. Figure 2 shows the performance of sDeFi compared to its current constituent tokens. Over the 7-week period, $LINK is the best performing constituent token, up 4%, and $CRV is the worst constituent token, down 79%. Note that $sDeFi was frozen for a few days in mid-October.

Figure 2: Performance of $sDeFi and constituent tokens since September 14, 2020

Table 1 lists the performance of individual tokens and two funds from September 14 to October 31.

Table 1: DPI and sDeFI and their components from September 14 to October 31, 2020

Comparing these two funds to $ETH and $BTC shows that both funds, like DeFi, lag behind the two major cryptocurrencies (Figure 3). As expected, the two funds produce similar profiles.

Figure 3: Performance of $ETH, $BTC, $DPI, and $sDeFI from September 14 to October 31, 2020.

October 11th - October 31st, 2020: $DeFi+L and $DeFi+S.

In October 2020, PieDAO launched two funds targeting the DeFi industry. Both funds are based on Balancer pools and are 100% collateralized for the tokens contained. Since the market price data from Coingecko used in this review takes a few days to settle, I will use October 11 as the starting date for the comparison. Obviously, the short time period considered makes it difficult to make any firm conclusions at this time.

Figure 4 shows the performance of $DeFi+L and related components. It shows that $LINK is up (+4%), while $AAVE is the biggest loser (-49%). Overall, the index is down 23% in this short period of time.

Figure 4: Performance of $DeFi+L and its constituent tokens since October 11, 2020

Figure 5 shows the performance of $DeFi+S and its constituent tokens. $PNT is the worst performer among the smaller DeFi constituent tokens (-7%), while $LPR has the largest drop of -38%. Overall, the index has fallen by 26% in this short period of time.

Figure 5: Performance of $DeFi+S and constituent tokens since October 11, 2020

Figure 6 shows the overall performance of all four funds, as well as $ETH and $BTC over the three-week period. The funds show a similar picture, with losses ranging from 19% to 26% reflecting the overall performance of the DeFi sector.

Figure 6: Performance of ETC, BTC and DeFi index funds from October 11 to October 31, 2020

Table 2 lists the performance of each component token in the 4 index funds and their current weights. $DeFi+L performed slightly better than the other indexes due to the larger proportion of $LINK. It seems that the improved performance of $sDeFi during this period was due to its freezing in the first 9 days (when $DPI fell 9%).

Table 2: Performance of $DPI, sDeFI, $DeFi+L, DeFi+S and constituent tokens from October 11 to 31, 2020

Final Thoughts

All four funds attempt to give people exposure to the average performance of the DeFi sector. All funds successfully achieve performance within the range of the underlying assets and provide protection against the downside of individual performance (which is expected from a diversified fund). Hopefully when I next revisit these numbers, there will be some "green" in DeFi.