2021 turned out to be a great year for the DeFi space. Total Value Locked (TVL) as measured by DeFi Pulse nearly quadrupled, crossing the $100bn mark several times during the year.
Since its founding, the mission of DeFi Pulse has been to make DeFi accessible to everyone and provide an objective and fair view of the space. Pulse.inc is DeFi Pulse’s subsidiary that acts as methodologist and index provider for innovative indices in the DeFi space. In that role it aims to develop indices that provide diversified exposure to DeFi or complex investment strategies, so they can be wrapped into a single token that can easily be bought, held, and sold.
This user-focused approach has led to the TVL that is tracking Pulse.inc’s methodologies to significantly increase throughout 2021. Pulse.inc started 2021 with a single index, the DeFi Pulse Index, tracked by $25m and ended the year with three more indices, the Flexible Leverage Indices, and a TVL of over $300m.
All indices were implemented by the Index Coop and TokenSets. The respective tokens can either be bought and sold on exchanges or directly be minted and redeemed for its constituent assets – something impossible for retail investors in traditional finance.
DeFi Pulse Index
Launched by Pulse.inc in September 2020, the DeFi Pulse Index provides diversified exposure to some of the largest DeFi protocols and allows investors to buy and hold one token that itself holds 17 tokens (as of Dec. 31, 2021). The index is market capitalization-weighted with a Flexible Capping of 25% and is accessible via Index Coop’s DPI token.
Despite a maximum drawdown of 65% in the summer, the DeFi Pulse Index ended 2021 with a 153% return.
A look at the index allocation shows that the DeFi Pulse Index was well diversified throughout the year. From a component perspective, the effective number of assets stayed around 7. From a sector perspective no single type of DeFi service dominated the index – DEXes, lending platforms, derivatives platforms, asset management protocols were represented:
Clearly visible in the chart are the addition of SUSHI in March, the introduction of 25% capping in April, and LRC’s rally in November.
A performance attribution analysis that decomposes the total index return into the return contribution of each constituent can further give insight into the workings of the index. The analysis combines token returns with the respective index weights.
About 50% of the 153% return came from the UNI allocation, 45% from AAVE, and 25% from MKR. Negative return contributors were mostly tokens with smaller allocations, and hence no negative contribution was lower than -1%.
Key DPI Token Stats
- There are now over 17k DPI token holders
- The DPI total supply stands currently at 530k units
- Over $20m of DPI liquidity is available across decentralized exchanges such as Uniswap, Sushiswap and Balancer
- DPI can be deposited into lending protocols or vaults like Aave and Vesper to earn interest
- DPI options are available for trading on Siren Markets
Flexible Leverage Indices
Looking at the strong demand since the first launch in March, Flexible Leverage Indices, or short FLIs, were clearly solving a problem for DeFi users. Creating and maintaining a leveraged position used to be risky, tedious, and expensive. FLIs solve all these problems:
- The health of the debt position is continuously monitored, the index is frequently rebalanced, and fast automated deleveraging is possible in extreme scenarios.
- All the work is automated, the FLI contract manages the collateralized debt position, and leverage exposure can be accessed with a simple token buy.
- The fee the user pays is well below other leverage products.
FLI tokens allow traders to quickly bet on price movements by gaining 2x exposure to the respective underlying token (ETH, BTC, more to come in 2022!) while longer term holders can provide the necessary liquidity and earn trading fees in return.
Pulse.inc realized during the year that increasing gas prices make these products inaccessible for smaller investors and prevent them from being trading tools. Therefore, together with Index Coop and Set the first FLI natively on Polygon was launched in December.
Conclusion & Outlook
In 2021 Pulse.inc has become a major service provider in the DeFi space within its first year of existence, and this position is set to become more pronounced as Pulse.inc continues to ramp up its first-in-class and user-focused services in the years ahead.
Indeed, there’s much left to create as DeFi opens up vast new horizons of financial opportunities. Pulse.inc will continue to build toward these horizons and unlock their possibilities for the long haul. The future of finance is open and programmable, and Pulse.inc is dedicated to making that future as empowering as possible for as many people as possible!
In the meantime, keep up to date with Pulse.inc’s newest releases by following DeFi Pulse on Twitter.
Happy New Year!