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 email@example.com.
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January was a month of explosive growth for DeFi TVL! It skyrocketed from ~$38.8B to an impressive ~$48.7B, a whopping 25% increase in dollars. On the other hand in native unit, TVL decreased by around 2M ETH from 19.5M in December. Ethereum chain dominated with a market share of 58-60% of the total TVL, while Tron and Binance chain trailed closely behind at 10-12% each.
The DeFi space was buzzing with excitement as the DEX volume reached ~$48B in the past 30 days. In a stunning upset, Lido Finance dethroned the long-standing king of TVL, MakerDAO, by claiming the #1 spot with ~$7.5B in TVL over the past 30 days. MakerDAO slid to #2 with ~$6.9B, while AAVE and Curve tied for 3rd place with ~$4.4B in TVL. Uniswap was overtaken by Convex Finance, who claimed the #5 spot with ~$3.7B in TVL.
Hence, opportunities mentioned in December’s Asset Allocation report (guided by our internal risk framework and thresholds) have been reallocated to ensure resilience and a new strategy has entered production at the end of the month. On the other hand, the relief rally positively impacted some of our strategies with exposure to protocol-based liquidity incentives.
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 increase our stablecoin rates and is expected to continue doing so in the future while being maintained by our algo, 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 January 2023. If you want to learn more about where Coinchange rates stand compared to the industry read our Yield Index report January 2023
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 January 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 30.8% of stablecoin deployments are in MMP protocols, a slight decrease from December. MMP protocols provide a relatively constant, stable yield given current market environments with slowly increasing borrowing demand.
69.2% of stablecoin deployment is allocated to the DEX protocols as of January 31st. The reason being that our DEX strategy which has been resumed since December has been benefiting from increased DEX volume while major parameters stayed within threshold allowing it to generate substantial returns.
0% of stablecoin deployment is allocated to staking protocols. The Staking strategy has been being stopped at the beginning of the month because the algo determined that strategy parameters such as volatility and interest rate fluctuations amongst other metrics were not within threshold hence did not motivate a continued deployment of assets.
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 January 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, models, 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 plus a few updates on work done to achieve 2023 goals:
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.
- Version 3.0 of on-chain execution is the first step toward creating a fully on-chain non custodial product for 2023.
- 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
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