Welcome to Coinchange’s Asset Allocation Report where we provide information on how Coinchange deploys client's assets and diversifies the investments while minimizing risks and maximizing potential earnings. The Asset Allocation Report is published on a monthly basis to ensure we provide up to date and relevant key metrics related to the state of the client assets.
This report covers the deployed assets over broad categories of protocol types, blockchains and client invested currencies. Within those categories, the deployed assets are allocated to specific strategies, which undergo continuous optimization and re-allocations based on the evolution of the market, DeFi protocols, and the technology landscape.
We welcome community feedback to evolve this report to suit your specific needs. Feedback can be provided by sending a message to firstname.lastname@example.org.
December was a snore-fest for DeFi TVL: It started at ~$42B and ended at ~$39B. Ethereum chain was snoozing with a 58-60% share of the total TVL whereas runner up Binance chain held around 10-12%. TVL in native currency for Ethereum (ETH), has held the 19M ETH mark the whole month with short lived ups and downs caused by remaining fear from FTX/Alameda collapse onto major CEX like Binance, Kraken, Huobi etc...
There wasn't enough activity to get the DEX (Decentralized Exchange) volume to move from the previous month hence it stayed relatively flat around ~$5 Billions. We saw a short uptick in the middle of the month to ~$9B but then shortly came back down to previous level. MakerDAO once again topped the list by maintaining its TVL at ~$6.2B over the past 30 days. Lido Finance also maintained its second spot with ~$6B, followed by Uniswap (which was #5 last month) at ~$4.6B. AAVE and Curve settled for a tie at the 4th place with ~$3.7B in TVL.
Hence, opportunities mentioned in November’s Asset Allocation report (guided by our internal risk framework and thresholds) have been made more resilient alongside a new strategy variation being deployed. On the other hand, the depressed price ranges across the board continue to have an impact on some of our strategies with exposure to protocol-based liquidity incentives, just as they did in November
These strategies have been made more resilient to only use the best performing pools while still maintaining the portfolio non-correlated. The new strategy variation has helped improve our stablecoin rates and is expected to continue doing so in the future, thus showing the portfolio's capability to capitalize on different market outlooks.
For more information on the state of the market and DeFi, read our DeFi Research News December 2022.
Strategy Concepts and Investment Philosophies
Coinchange is a technology platform that allows users to earn crypto on their holdings by facilitating yield generation through DeFi strategies. Coinchange strategies are automated systems, based on proprietary financial models that rebalance funds in the DeFi ecosystem as per changing market conditions. Our strategies fall into the following areas of the DeFi ecosystem:
Liquidity Provisioning (LP) Strategies
LP strategies are based on participation in DEX protocols. LP plays an important role in Coinchange yield generation vision as it generally provides stable and uncorrelated returns agnostic to the direction of the market. DeFi protocols involved in Coinchange LP strategies include Uniswap, PancakeSwap, TraderJoe and others.
Coinchange LP strategies involve complex hedging and proprietary algorithms that help to maximize yield while keeping the strategy market-neutral. This helps eliminate the risks associated with LP pools that involve volatile currencies such as Ethereum. In addition, Coinchange strategies take advantage of the additional staking of reward tokens provided by associated AMM (Automated Market Maker) protocols.
Lend/Borrow and Arbitrage Strategies
DeFi lending protocols such as AAVE, Venus and others are at the core of this family of strategies. Coinchange strategies are able to maximize earnings using proprietary financial models to maintain optimum collateral levels (with respect to liquidations), stack multiple borrow/lend cycles, and include reward tokens into the yield cycle.
Coinchange also deploys sophisticated strategies that capitalize on arbitrage opportunities in the lend/borrow protocols. Such strategies can be highly beneficial in faster markets with greater levels of activity and price fluctuations.
These strategies take advantage of niche opportunities where staking is the primary mechanism for yield generation. One such strategy leverages the pegged nature of staked Ethereum and uses it to boost the returns of basic Proof-of-Stake Ethereum staking.
Coinchange only deploys assets on quality, widely used, and time-tested DeFi protocols. Below is a list of protocols used in Coinchange strategies:
- AAVE v2-3
- Uniswap v3
Stablecoin Assets under Management Breakdown
Managed Asset Mix
Below is the distribution of client stablecoin assets managed on the Coinchange platform as of December 31st. Coinchange accepts USDC, USDT and Dai on the Ethereum network. The distribution clearly shows a high preference towards usage of the USDC asset.
Stablecoin Asset Allocation Breakdown per DeFi Protocol Type and Blockchain
Coinchange strategies accept and deploy client assets to various DeFi protocols, where each strategy has an algorithm and a set of currencies that it works with. The strategy is able to convert and deploy the assets, and later return them to the original asset upon withdrawal. The analysis below highlights Coinchange’s portfolio structure and the diversification to market mechanisms in the portfolio.
DeFi Protocol Type Groups
DEX: Decentralized Exchange Protocols (aka AMM and LP)
- Uniswap v2
- Uniswap v3
MMP: Money Market Protocols (lending and borrowing)
- Aave v2
- Aave v3
Staking: Staking Protocols for Governance and Blockchain Tokens
The chart below shows strategy asset distribution among the DeFi protocol types. The current portfolio breakdown per protocol type highlights the portfolio's diversification to market mechanisms while taking the current market environment into account. This protocol distribution is the direct result of the models and algorithms operating behind each strategy.
It can be seen that 35.4% of stablecoin deployments are in MMP protocols, a ~56% decrease from November. MMP protocols provide a relatively constant, stable but low yield given current market environments.
42.9% of stablecoin deployment is allocated to the DEX protocols as of December 31st. The reason being that our DEX strategy has been resumed at the beginning of the month since our algo determined that the set of pools and parameters came back within threshold allowing it to benefit from steady DEX volume.
21.7% of stablecoin deployment is allocated to staking protocols. Coinchange strategies based on these protocols have an attractive risk/reward ratio in the current market environment. There are, however, higher transaction costs to consider, and this is reflected in the proportionate allocation percentages.
The chart below shows the resultant strategy asset distribution among blockchains. The blockchain distribution directly reflects the protocols being used by the strategies. Currently, each Coinchange strategy operates on one blockchain only. It is valuable to note that Coinchange strategy portfolio is well diversified across blockchains as another important risk mitigating factor in the risk profile of the portfolio.
Volatile Asset under Management Breakdown
Managed Asset Mix
The chart below shows the asset mix of Bitcoin and Ethereum managed on Coinchange platform as of December 31st. Ethereum yields have historically been much stronger than Bitcon yields, which may explain a clear preference to invest in Ethereum.
Volatile Asset Allocation Strategy
Currently, allocation for both currencies (ETH and BTC) is 100% in MMP (Money Market Protocols). MMP type protocols are preferred in the current market environment as they provide a fairly constant and stable yield for volatile assets with minimum amount of risk.
MMP protocols, which host 100% of Coinchange ETH and BTC assets, are running on the Avalanche blockchain.
What Coinchange Team is Working on Next
Coinchange DeFi R&D team developed a Framework for Algorithmic Yield Strategies (FAYS) in the DeFi ecosystem and is continuously working on the next iteration. FAYS consists of a set of tools, frameworks, and processes with the objective of quickly creating and managing effective, secure, and fully automated strategies for yield generation. The goal is to have portfolios of diversified strategies across chains, protocols, and market mechanisms. As we navigate the shifting landscape of DeFi yield, we continue to enhance our tools and internal processes to optimize performance and security. Below are a few points that the Coinchange DeFi R&D team worked on during 2022:
Major on-chain platform updates:
- We released a completely new on-chain execution framework version 2.0 for Centralized DeFi company. All the necessary strategy actions are now executed at once in each transaction (transactions atomicity) and are available on all EVM-compatible blockchains.
- We extended and upgraded the on-chain execution framework to a non-custodial environment with version 3.0. which makes our on-chain execution fully transparent and secured. It implements the concept of operator/deployer and beneficiary. This separation of roles ensures the highest security of asset management.
- We created an automated multi-token multi-blockchain bridging solution for automated and instant portfolio rebalancing resulting in protection against overconcentration, improving portfolio performance, translating into a higher earn for customers.
Quant research and development:
- We developed and implemented algorithms that allow full automation of new strategies, including lending/borrowing carry trade and liquidity provisioning with hedging.
- We conducted research and development of the cornerstone carry trade sequencing algorithms using algorithmic genetic approach
- We completed universal backtester for all our algorithms that uses historical and real time protocol data
- We accurately collected and aggregated data using our own archive nodes which eliminates dependencies on 3rd party node services providers in case they go offline.
- We created centralized services for authorization/authentication, configuration management, transaction processing/signing which improves the security
- We developed automated monitoring/risk management tools
- We paid all the fees on behalf of the user and minimized them by off-chain strategy setup
Please let us know if there is anything more you would like to see in our future reports by getting in touch with our support team here