Risk & return analysis (Part II) - DPI vs competitors

I’ll just post a few tables and charts here. You can read the full article here.

Given the short performance time frame, I wanted to look at the relationship between the DeFi index products and BTC & ETH. I excluded PIPT as well as DEFI++ from this analysis, given their short performance histories. This leaves us with four products: DPI, sDEFI, DEFI+L and DEFI+S.

The time period for this analysis is October 22nd to December 23rd for all products, and I will keep updating it going forward. I ran into some issues with the sDEFI data. Coingecko is missing all historical information between October 7th and October 21st. I wanted to use CoinMarketCap numbers instead, but they didn’t align with the Coingecko data at all. Here’s an example. As such, I decided to start the analysis from October 22nd and use Coingecko prices for BTC, ETH and all index products.


Perhaps, it is a sign that crypto is not ready for serious analysis – we can’t even agree on a closing price for a security. But I digress.

First, I wanted to look at the correlations.


All four products are somewhat correlated with BTC, with correlations between 0.43 and 0.50. Their correlation with ETH is more meaningful, between 0.64 and 0.70. Looking at the relationships between the four DEFI index products, we can see that most correlations are above 0.7, suggesting a strong relationship. For example, DPI and DEFI+L and DPI and sDEFI have a correlation of 0.95 and 0.91, respectively. This tells us that they moved virtually in lockstep over the period between October 22nd to December 23rd. Correlation between DEFI+L and sDEFI is also strong at 0.89.

Correlation only gives us the directional idea of how these products move. To get the sense of the magnitude, we need to look at beta. Beta measures the magnitude of the relationship between two products. If Security A has a beta of 1 to security B, it means that each time security B goes up by 1%, security A will go up by 1% as well.

Note to reader: This chart is meant to be consumed horizontally, not vertically. The beta of BTC to ETH will not equal the beta of ETH to BTC.

All index products have higher beta in relation to each other than the majors. To some degree, this speaks to the fact that their performance is driven more by idiosyncratic factors than the market overall. Once again, we can see the very close relationship between DPI, DEFI+L and sDEFI over the period.

Another interesting metric that we can use is upside and downside capture against BTC and ETH. Upside capture indicates, on average, how much on Bitcoin’s upside does a token capture, same story on the downside.


Ideally, we want upside capture to exceed downside capture resulting in a positive net number. That’s what we would be looking for from an asset manager, for example. In relation to BTC, only DEFI+L satisfies that criteria, while DPI is reasonably close to neutral net capture. sDEFI is not doing too well on this metric, and DEFI+S is worse still. When it comes to ETH, we see a wider range of outcomes. Upside capture ratios are anywhere between 73.6% for DEFI+S and 110.6% for sDEFI. Downside captures for ETH are above 100% for the most part, meaning that these DEFI index products usually move by more than ETH on the downside. The only exception here is DEFI+L. Overall, only DEFI+L has neutral net capture for ETH, while DPI and sDEFI are single-digit negative, and DEFI+S lags behind.

I saved standard deviation for last. Standard deviation is the primary measurement used for volatility. It measures how widely returns are dispersed from their average. We can see that DEFI+S is the least volatile index product, by a small margin, while sDEFI exhibits significant volatility, nearly double the volatility of BTC.


We can also consider what happens to the volatility if these DEFI index products are held together with either BTC or ETH. In this particular case, diversification doesn’t add much value in terms of both risk and return, even though correlation between BTC and various index products is moderate. Here’s the reason why. Usually, we tend to see higher risk products delivering higher returns. In our case, however, BTC has the lowest risk and highest return, while index products have the highest risk and lowest return. Obviously, the period of observation is limited. Alternatively, Bitcoin just might be the best game in town at this point.

Here are the numbers. 50/50 BTC and 80/20 BTC represent a portfolio with 50% allocation and 80% allocation to BTC, respectively. Same with ETH. 40/40/20 is a 40% BTC, 40% ETH and 20% index fund portfolio. I used daily standard deviation and cumulative returns over the period between October 22nd to December 23rd.

DeFi Pulse Index (DPI)




Merry Christmas!


Very interesting and thought provoking.
As the crypto market evolves, BTC gets less volatile, and keeps gaining value.
Can we expect the same from DeFi, in the mid-term / long-term ?
If it gets to that point and DeFi keeps going, the winning DeFi projects - they will be part of the DPI - will probably have a comparable behavior pattern as BTC and ETH have right now.

Question: does it make DPI or any other DeFi Index more interesting for getting into in, let’s say, a couple of years (no idea of the time frame) ? While in the meantime holding BTC, ETH - and/or eventually other major players - would be the best strategy?

(I hope i’m clear - english is not my primary language, even more so for finance :slight_smile: )


I think it all depends on whether Bitcoin matures at some point, meaning lower risk and lower return. For the time being, it is still delivering superior returns with the lowest risk profile. When it does mature, other assets (could be DeFi or NFTs or anything else) might be able to deliver better returns than BTC albeit with higher risk.

This is the environment in which diversification, meaning DPI, should have a meaningful positive effect on portfolio performance.

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