Uphold DeFi Income Index
Uphold DeFi Income Index tracks the top 15 DeFi tokens and generates a yield via staking and lending index tokens. The index is rebalanced on a quarterly basis to reduce turnover and negative gamma scalping. Dividends are paid out quarterly to encourage holders to keep their assets invested in the index.
The DeFi Income Index is an attractive offering for long-term investors as it generates a stable yield and captures the upside of the large and middle DeFi protocols.
The objective is to have an on-chain version of the Income Index Fund that will enable retail participation. Uphold is launching an on-shore version of this fund for institutional and accredited investors. A tokenized version would allow retail investors to participate as long-term investors in DeFi.
Value Proposition - Investors
- A diversified portfolio of top DeFi protocols
- Lower transaction costs and turnover results in larger upside participation
- Yield accrual from staking and lending distributed on a quarterly basis
Value Proposition - Index Coop
- A co-branded product that can be listed on Uphold (subject to Uphold internal compliance approval)
- Marketing support from Uphold as the off-chain version will be marketed to institutional investors and family offices on-shore and off-shore
Size of Opportunity
The DeFi Income Index (DII) fund should rival DPI and Bitwise DeFi Index in terms of AUM. A first-year target AUM of $100mm is realistic given the growth of DPI and BDPI.
- Quarterly Rebalancing
DII is different from current DeFi index funds as it is rebalanced quarterly versus monthly. Token selection is also based on the trailing 3-month average market capitalization to smooth volatility associated with DeFi token prices and circulating supply changes. It also generates a yield from staking and lending which is currently only achieved via BDPI.
- Token Universe
The universe of tokens is also different from DPI as it includes projects not associated with a decentralized finance protocol or dapp listed on DeFi Pulse - i.e. ChainLink and The Graph Protocol. The token universe consists of the top 50 tokens sorted by market cap from CoinGecko for the previous 3 months. Please the Methodology section for the details of which tokens were included in the list.
On-chain Liquidity Analysis
All assets are available on DEXs with deep liquidity.
The data used in the backtest was the weekly historical data from coinmarketcap.com. The top 50 names sorted by market cap were used after first filtering to exclude tokens per the methodology listed below.
Back Test Methodology
Four different indices were created to determine the effects of 1) having 10 or 15 constituents and 2) monthly or quarterly rebalancing. The indices created are:
- Monthly_10: 10 constituents, rebalanced monthly
- Monthly_15: 15 constituents, rebalanced monthly
- Quarterly_10: 10 constituents, rebalanced quarterly
- Quarterly_15: 15 constituents, rebalanced quarterly
The index start date was 9/30/20 and the backtest ended on 3/31/21. The index weighting follows the free-float market capitalization methodology listed below.
After six months, the quarterly_15 index outperforms the other indices in terms of the overall return on a gross and net basis.
Figure 1. Monthly return analytics
Figure 2. Monthly index returns from 9/30/20 to 3/31/21
Figure 3. Index values from 9/30/20 to 3/31/21
Quarterly 15 component index
|9/30/20||LINK, AAVE, MKR, COMP, SNX, YFI, ZRX, UMA, KNC, REN, AMPL, LRC, BAND, NXM, UNI|
|12/31/20||LINK, UNI, AAVE, YFI, MKR, SNX, COMP, UMA, ZRX, REN, SUSHI, LRC, KNC, AMPL, RSR||SUSHI, RSR||BAND, NXM|
|3/31/20||LINK, UNI, AAVE, SNX, MKR, COMP, SUSHI, GRT, YFI, UMA, ZRX, REN, LRC, BNT, RSR||GRT, BNT||AMPL, KNC|
- Be an ERC-20 token
- The token must be a digital bearer instrument. The following are excluded:
- Wrapped tokens
- Stable coins
- Synthetic assets
- A derivative token that is pegged to another crypto asset, fiat currency, hard asset, or group of currencies
- The token must not be considered a security by the corresponding authorities across different jurisdictions
Token Supply & Liquidity
- Tokens must trade on 2 or more crypto exchange trading venues
- The 30-day trading volume on 2 or more crypto exchange trading venues must be > 10% of its circulating supply
- The protocol shall have undergone security audits for each major release and follows best practices to ensure that its users’ assets are safe
- The protocol team must have significant communication and interaction with their community and respond to major issues promptly
- Tokens shall be lent on platforms that have a significant safety track record and has a treasury > 100% of the tokens lent to their platform
The DeFi Income Index consists of the top 15 largest DeFi assets based on the trailing 3-month free-float adjusted market capitalization. The market capitalization calculation utilizes the circulating token supply from TBD (currently deciding between CoinGecko and Messari) and the closing price as of 00:00 UTC.
Third-Party Index Provider
The underlying DeFi index calculation, without income generation, shall be generated by TBD using TBD (currently deciding between CoinGecko and Messari) proprietary circulating token supply calculation and pricing.
The DeFi Income Index shall be rebalanced on the last Friday of the quarter.
The index uses a base level of 1,000 as of 00:00 UTC on its inception date.
The index constituents and weightings are determined on the third-to-the-last day Business Day of the quarter at 00:00:00 UTC. This date shall be considered the “record date”.
The index composition is reconstituted quarterly at 00:00:00 UTC on the last Business Day of the quarter.
60% Index Coop; 40% Methodologist based on Methodologist fee menu.
Uphold methodologist score:
- Comprehensive Methodology 1.0
- 50% of the seed initial liquidity 0.5
- 0% liquidity mining incentives 0.0
- Business development & sales effort 0.5
Author Background & Commitment
Tesa Ho is a portfolio manager for Digital Asset Alpha, a cryptocurrency hedge fund under Uphold Asset Management Ltd. Tesa’s background is in quantitative and high-frequency derivatives trading.
Uphold is a digital aggregation platform and fiat on-ramp that allows people to purchase crypto assets, carbon credits, and fractionalized US equities. Uphold serves over 184+ countries with a dominant consumer base in Latin America and Europe.