Unlocking the Investment Potential of DeFi: A Data-Driven Approach
Following the digital assets space often feels more like watching a captivating drama unfold. It's a world filled with an ever-evolving cast of characters, plot twists, courtrooms, and fortunes both gained and lost. Yet beneath the headlines lies an elegant and data-driven realm of code, blockchain data, statistics, and economic incentives intertwining to create novel financial applications and markets. This is the world that Story of DeFi (SoDeFi) inhabits, and it aspires to share data-driven insights with the fintech community. Cryptocurrencies, and in particular Decentralized Finance (DeFi), represent a new financial paradigm to study, learn from, and potentially profit from. As we delve into this new paradigm, SoDeFi aims to serve as a partner and guide through the ever-evolving investment and economic landscape.
The Rise of DeFi
The journey of DeFi has been nothing short of remarkable. From its humble beginnings as Ethereum-based DApps to the current cross-chain, interoperable solutions that span multiple blockchains, DeFi has evolved into a multi-billion-dollar industry. Total Value Locked (TVL) in DeFi, which started with modest figures in 2020, has now reached $36 billion. However, it's essential to note that, in the wake of the 2021 market decline, the DeFi space has experienced some retracement in 2023.
Decentralized Finance applications offer an alternative to traditional finance, promising increased control, transparency, and accessibility. While the ultimate winner in the battle between DeFi and traditional finance remains uncertain, this competition brings innovations to the old ways of doing things and potential financial opportunities for those willing to engage in this new world.
The Missing Investment Framework
In traditional finance, investment decision-making is supported by well-established financial frameworks from both an academic and practical perspective. Valuation decisions often rely on Net Present Value or multiple analyses, while asset portfolio construction finds assistance in models like the Capital Asset Pricing Model. However, the digital asset world lacks such well-defined starting points and intuitions
Navigating the digital asset and DeFi landscape requires recognizing that many digital assets or tokens lack clear definitions. Contentious debates have ensued, even before the US Congress, about whether Bitcoin or Ethereum should be classified as securities, commodities, or something else. Through practical examples and academic insights, Story of DeFi aims to shape a decision-making framework that enhances outcomes for DeFi participants. The SoDeFi methodology seeks to introduce definitions for token utility and application and provide a data-driven guide for DeFi investment.
Introducing SoDeFi: Your Data-Driven Guide
SoDeFi offers a two-pronged approach to navigating DeFi participation and investment: first by tracking DeFi development and second by analyzing yield opportunities.
1) Tracking DeFi Development
Understanding DeFi's growth areas is essential. SoDeFi tracks the development of the DeFi space, identifying emerging trends and opportunities. This analysis explores growth trends across the largest chains, the number of projects, and the variety of DeFi pools. The aim is to showcase areas likely to yield significant returns. The information is updated every week and is sourced directly from the blockchains via DeFillama.
2) Analyzing Yield
DeFi yield remains an integral aspect of the fintech space, providing a unique source of income returns in a world with historically low-interest rates, although this has dramatically changed in 2023. SoDeFi analyzes yield across three dimensions:
Benchmark Rates: SoDeFi produces benchmark rates across stablecoins and Ethereum pools. Below is a snapshot of the 7-day rolling yield across 1,500 DeFi pools. The benchmark rate has been created using statistical methods to remove any outliers from the data set.
Payout Rates: For the next layer of analysis, SoDeFi scans payout rates across the ten largest EVM blockchains and the 25 largest EVM Decentralized Applications (D’Apps). Below is a visual representation of the spread of stablecoin yield opportunities, demonstrating the median and range of DeFi pools.
Pool Scoring: Lastly, SoDeFi presents all applicable pools and scores them for sustainable income using a proprietary scoring mechanism. Below is the full mapping of stablecoin pools present across the 10 largest blockchains. In future posts, we will delve into how the SoDeFi scoring methodolgy helps to filter for the most sustainable yield.
Join the SoDeFi Journey
As we journey through this ever-evolving landscape of DeFi, SoDeFi aims to be your data-driven ally, guiding you through the complexities, defining your strategies, and helping you maximize returns in the world of decentralized finance. Stay tuned for more updates as we delve deeper into the world of DeFi and the fascinating insights it continues to offer.
