DeFi indexes lack diversify — analyst claims

November 26, 2020
By Sam Grant

New research shows indexes based on DeFI tokens are not diversified enough for the advanced investor

The research claims that indexes have overexposure to a few DeFi tokens, which invalidates the whole point of diversification. This makes them ‘poor’ investment options for advanced investors looking to manage their risks.

The DeFi boom seen in the third quarter of the year saw many indexes crop up in the sector. The idea behind indexes is to get broad exposure without doing the tedious work of buying the assets individually.

Popular analytics provider, DeFi Pulse, launched their index in September when the hype around DeFi peaked. However, Roberto Talamas, an analyst at Messari, believes that the DeFi Pulse Index leans more on some assets than others.

“The DeFi Pulse Index (DPI) now has over 35M in assets showing increased demand for crypto indexes. While DPI is a good investment for beginners, it may not provide the diversification that sophisticated investors demand, leaving them overexposed to individual DeFi assets,” he posted on Twitter.

Talamas further pointed out that although these indexes have the benefits of broad exposure and lower fees, they can be less than ideal. He argued that they are often heavily weighted towards some assets, thus reducing the diversification benefits.

The analyst studied the DeFi Pulse Index, and after evaluating the product, he discovered that only four assets represent 77% of the portfolio. These assets are Synthetix’s token that holds 13.29%, Yearn Finance’s token that accounts for 17.87%, Aave’s token, which represents 20.18%, and Uniswap’s token that controls 26.12%.

Talamas highlights that any significant movement from either of these assets impacts the index performance heavily due to their immense contribution.

Interestingly, this analysis is true for many other DeFi indexes. Synthetix’s sDEFI, for instance, is concentrated with only four tokens. These are SNX, Compound, Kyber Network, and Maker that collectively account for about 60% of the portfolio.