Yield Indexes and Benchmark Comparison - Stablecoin Assets April 2023

Yield Indexes

April Comparison

For the month of April, Coinchange has gained back its status as highest APY amongst all indexes at an impressive 8.84%, which it had lost in November after staying in this position 2 months. CeFi Yield index is back close to its December 2022 rate at 7.32%, and thus is recording 6 consecutive months above 6% APR. The DeFi Minimum Risk Rate has decreased by a whopping -6.18% to stand at 2.08%, in line with the normal level since November 2022. 

Our rate remains multiples higher than the CeDeFi index while not having any lockups, minimum investments requirements, being fully liquid and soon offering a non-custodial product. Most CeDeFi platforms suffered losses because of a hack on one protocol that they were all using to generate yield, which they successfully recovered in April after the said protocol was able to recover almost 100% of the funds.

The DeFi lending index decreased by almost -3%, reversing the gains recorded in March, currently standing at 2.67%. As the high volatility of the market and borrowing demand for USDT in both Compound and AAVE during USDC’ depegging event has subsided,  lending rate have normalized alongside with protocol changes to interest rate slope to alleviate such high utilization. The CeFi Yield Index baseline of 6% APR could be thought to be unsustainable or instead showing continued appetite from hedge funds and traders. Especially when most of the institutional money and funds have put crypto on “hold” since all the events that happened in 2022 and the global macro environment. 

In April bank runs and bankruptcy acquisition (Silvergate, Signature, SVB, First Republic Bank) are still making the news while FTX/Alameda and related bankruptcies seems like an old story. The Fed raising rates even though markets and banks are suffering is likely making matters worse since core CPI YoY for April was 0.1% higher than March at 5.5%. Price action  was very volatile in April in the range of $30k and $27k per bitcoin while we ended the month with just +3.8%. If you want to learn which metrics investors look at in such market conditions head over to our blog where we cover the subject. We also cover the subject in our latest DeFi Research News. For April, we did not reintegrate  the pools removed in March since funds lost were only recovered at the end of the month, we’ll add them back in May. We have reintegrated 1 of the 4 pools removed in March from the DeFi Yield index because the TVL threshold was met this month. We removed 1 pool from the DeFi yield Index and added a new one.

The chart below provides a snapshot of the rate across indexes and standalone rate for the month of April. We then describe the component within each index and standalone rate via a legend. The methodology to calculate the rate is the monthly average over the time period (Apr 1-30) for USDC, USDT and DAI. The exceptions are the DeFi Minimum Risk Rate which uses a 30 day average TVL weighted stablecoin 30 day average lending rate, and Coinchange which uses a weighted average rate (explained in its dedicated section).

We organize the indexes into 3 categories of risk. 

• Minimal risk: Risk-Free Rate non-adjusted for inflation as well as DeFi Minimum Risk Rate fall under this category. 
• Low risk: DeFi Lending Index and Coinchange rate are parts of the low risk category.
• Medium to High risk: CeDeFi yield, CeFi yield and DeFi yield are found in this category.

Indexes Legend 

Minimal Risk Indexes:

Comment on the index: In March the DMRR rate saw a drastic increase due to large borrowing demand for USDT on both AAVE and Compound. This environment has quickly reversed as AAVE and Compound took measures to ease the situation. 

DeFi Minimum Risk Rate 

• Calculation method: 30 day average TVL weighted 30 day average stablecoin lending rate (USDC, USDT, DAI)
• Index components: Compound on Ethereum and AAVE on Ethereum, Avalanche, Polygon, Arbitrum, Optimism
• Requirements details: Markets are fully liquid (can be withdrawn within minutes) without minimum investment with highest liquidity in DeFi. 
• Risk information: The index reflects the minimum level of risk an investor in DeFi can take to earn yield. The methodology and reasoning behind the DMRR is explained at the bottom of the document and aims to function as a benchmark for DeFi, similarly to how the ‘Risk-free Rate’ functions for traditional finance.
• Data sources: For AAVE and Compound rates we use Dune analytics query. For the TVL we use the aggregate numbers for AAVE v1, 2, 3  from DeFi Llama CSV export. For Compound TVL we use a Dune analytics query.

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Risk-Free Rate non-adjusted for inflation

• Calculation method: 30 day average 10 year U.S Treasury note yield, non adjusted for inflation.
• Index components: 10 year U.S Treasury note rate, non adjusted for inflation. 
• Requirements details: Highest amount of liquidity in the investable landscape, redeemable when the U.S market is open. Minimum investment can vary  depending on broker & dealer but generally the minimum is 1 bond worth $1,000.
• Risk information: Investment product carrying the minimum amount of risk an investor is willing to take to earn yield in TradFi. It is used as a benchmark in the traditional market to calculate and compare investments against each other. 
• Data sources: We use the non adjusted for inflation 10 year U.S Treasury note from the U.S Department of the treasury website.

Below is the historical performance of the indexes mentioned above since January 2022.

Low Risk Indexes

Comment on the index: Similarly to the DMRR rate the DeFi Lending index returned to its normal average rate. Coinchange heavily benefits from those spikes in MMP increased rate. 

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DeFi Lending Index 

• Calculation method: 30 day average stablecoin lending rate (USDC, USDT, DAI)
• Index components: Compound on Ethereum; AAVE on Ethereum, Avalanche, Polygon, Arbitrum, Optimism; Venus on Binance Smart Chain
• Requirements details: The markets are fully liquid (can be withdrawn within minutes), without minimum investment and have among the highest liquidity in DeFi across networks. 
• Risk information: The main difference between the DMRR and DeFi lending index is the amount of risk taken via the component of the index. By adding more lending platforms to the index that still satisfy requirements, we gradually increase the risk of insolvency or risk of loss for the calculated rate. 
• Data sources: For AAVE and Compound rates we use Dune analytics query. For Venus rates we use DeFi Llama CSV export and manual recording for historical rates from Nanoly (H1 of 2022).

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Coinchange Yield

Comment on the index: Coinchange maintained its high rate after March increase due to couple of novel strategies being updated/released. More on this in our Asset Allocation report - April

• Calculation method: Weighted average stablecoin rate (USDC, USDT, DAI) across diversified & non-correlated DeFi strategies.
• Index components: Coinchange on Ethereum, Avalanche and Binance Smart Chain
• Requirements details: Coinchange does not have lockups or an investment minimum. Withdrawals are processed during the same day of the request. All funds are deployed in DeFi without CeFi counterparties and are fully on-chain. 
• Risk information: Coinchange’s strategies within each Earn account have protocol and blockchain diversification at the core. Strategies are non-correlated, meaning that it is diversified across market mechanisms while benefiting from outsized growth. Learn more in our Asset Allocation Report - March and Asset Allocation Report - April.  
• Data sources: Directly pulled from Coinchange backend, the same rate as the one earned by Coinchange users.

Below is the historical performance of the indexes mentioned above since January 2022.

Medium to High Risk Indexes:

CeDeFi Yield Index 

Comment on the index: 

Spool Finance, Idle Finance and Swissborg that lost funds due to Euler Finance’ exploit recovered almost 100% of the losses thanks to Euler Finance’s team efforts. Like in March we only used 1 vault in Spool as all others are below the TVL threshold of $300k. We only took DAI’ vault rate for Idle Finance this month since the other vaults  only recovered the funds late April, they will be added again in May. After not being fully impacted, Swissborg  did some unannounced changes in April, on their smart yield (low risk yield product) by bumping all smart yield from low to medium risk (as per their risk measures) and removed DAI from the available token to earn on. Hence only USDT and USDC rate are used from then on.

• Calculation method: 30 day average stablecoin rate (USDC, USDT, DAI) 
• Index components: Centralized companies operating in Decentralized Finance to generate yield: Coinchange, Idle Finance, Spool Finance and Swissborg.
• Requirements details: All platforms do not have lockups or an investment minimum while having high liquidity, except for Swissborg rates. We chose the rate that does not require a stake of Swissborg’s token. They enable higher yield but require lockups of 12 months and its platform token to be staked in various amounts to get to a certain tier account providing increased yield and reduced fees. 
• Risk information: In this index the only Low Risk rate is Coinchange whereas the others are medium to high risk. The primary risks are bankruptcy due to poor asset management practices with either too much leverage or lack of safeguard measure in place.
• Data sources: Wayback Machine snapshots for some historical rates but not all components have allowed the Wayback Machine to capture snapshots of their website. Hence we mostly use the rates displayed on the component’s web UI every week to calculate a 30 day average while saving screenshots in the database as proof. 

DeFi Yield Index 

Comment on the index:

We removed one pool from Beefy Finance since it has been retired in April, we added one pool to make up for the previous 3 that have been removed whilst making sure requirements are met. Only one of the two tracked pool in Autofarm has been added as the either is still below the $300k threshold.The other is still not included since waiting to go back above the $300k TVL threshold. The pool removed in MArch for Yield Yak has not been reintegrated since it does not satisfy the TVL threshold.

• Calculation method: 30 day average stablecoin rate (USDC, USDT, DAI, BUSD, MAI, MIM, sUSD) 
• Index components: Decentralized platform offering yield or aggregating yield across protocols and platforms: Yearn Finance, Beefy Finance, Autofarm, Yield Yak
• Requirements details: None have lockups or an investment minimum. Only pools with good liquidity, secure assets and safe protocols have been selected for each index component.
• Risk information: DeFi yield aggregators have varying degree of risk from medium to high depending on a multitude of factors such as: smart contract security, team relevancy, source of the yield generated, aggregation method for the yield, ownership and security of smart contracts. 
• Data sources: Yearn.Vision, maintained by Yearn.finance devs, is used to populate the rates. Displayed 30 day average rate on web UI is used for Beefy, while for Autofarm we manually record daily rates to calculate the 30 day average. Yield Yak rates are coming from DeFi Llama CSV export.    

CeFi Yield Index 

Comment on the index: 

Maple Finance rate only uses Maven 11 permissionless pool since November. Flow Traders and Portofino Technologies are the borrowers until June, while Portofino Technologies’ loans matured end of April and issued a new one right afterward. Regarding TrueFi, since TruefiDAO stopped lending entirely since TrueTrading (the only borrower) is restructuring its loan agreement with Detl.ai since January and has reached a final settlement. However those rates pertain to reimbursement of the defaults and are hence not taken into account in the index. USDC.homes hasn’t been reintegrated since its TVL is below the $300k threshold this month again. Coinbase Earn received a Well’s notice for its staking platform but is still operating as of today and even increased their USDC rate by 50 bps.

• Calculation method: 30 day average stablecoin rate (USDC, USDT, DAI)
• Index components: Centralized companies generating yield via lending interest primarily: Nexo, Goldfinch senior pool, Coinbase Earn. 
• Requirements details: Nexo does not have lockups or investment minimums but it has an investment maximum $100k after which, the rate decreases dramatically. This standard “retail rate” has been selected for the index. Nexo offers higher yield if chosen to earn in $NEXO rather than in kind along with holding a certain percentage of your portfolio value in the token indefinitely over time. Maple Finance pools selected are not permissioned to have the least amount of barriers to redeem funds. Goldfinch senior pool is selected because it has the lowest risk and highest liquidity available. Coinbase Earn USDC rate does not have an investment minimum.
• Risk information: Due to the business model of CeFi platform they carry significant amounts of risk, such as: borrowers default, bankruptcy risks, no asset control and low to no transparency, just to name a few. We have seen the extent of the damage this can cause with the bankruptcy of Celsius, Voyager, YouHodler, BlockFi and Genesis Global Holdco and two subsidiaries in January.
• Data sources: We use Wayback Machine snapshots of their website for some historical rates but not all components. We also use the rates displayed on the component’s web UI every week to calculate a 30 day average while saving screenshots in the database as proof. Lastly we use DeFi Llama CSV export when available and if accurate as per numbers displayed on the components UI.  

 Below is the historical performance of the indexes mentioned above since January 2022.

Performance Overview

Historical commentary:

DeFi related indexes (DeFi MRR, DeFi lending, DeFi Yield) had their rates decrease during Q1 2022 and stabilized in Q2 2022. DeFi Yield index, on the medium to high risk end, stabilized at the end of Q3 2022 while having a short lived uptick in July. Q4 2022 saw all DeFi related indexes move in a general uptrend. 

Regarding CeFi related indexes (CeDeFi Yield, CeFi yield, Coinchange) they followed the same pattern in general as the DeFi related yield indexes except for Coinchange which saw its rate increase up until Q1 2022. CeFi related yield indexes rate decrease in Q2 2022 and stabilized in Q3 2022 for CeDeFi Yield index while Coinchange and CeFi yield index saw a significant uptick. In Q4 2022 all CeFi related yield index moved in a general uptrend while remaining higher than beginning of Q3 but lower than end of Q3 rates.

Current performance commentary:

In Q3 2023 we saw a general uptrend of all indexes rate with March topping off Coinchange rate at 7.61% in 2nd place and the DMRR index at first place with 8.26%. This was largely due to overall relief rally, increased volatility benefitting DEX based and MMP based strategies deployed by Coinchange. This is especially true for March, where Coinchange rate got higher again than the CeFi Yield index which hadn’t occurred since October 2022. In April Coinchange continue to push its outperforming strategies leading to an impressive 8.84%. We further explore our strategies diversification and allocation across protocol types in our Asset Allocation Report - March and Asset Allocation Report - March.

CeFi Yield index remains close to its rate from Q4 2022, partly because Nexo rate remains at 8% since October despite all troubles around their competitions and themselves. It either shows continued borrowing appetite by hedge funds and traders supporting a well built model or unsustainable rates that can soon turn into defaults (i.e TrueFi and Maple borrower defaults). GoldFinch senior tranches have had incredible consistency at 7.8% APY since its addition in August 2022 highlighting the borrowing appetite from real world companies in need of efficient financing.

CeDeFi yield index has many components that suffered from the USDC depegging event in March after finally starting to decouple from the DeFi Lending Index and the DeFi Minimum Risk Rate, which has not happened since Sept 2022. Hence it stayed at the same level while all other rates jumped, highlighting the rigidity of most CeDeFi platforms while DeFi related indexes are all spiking up in current market conditions. It is showcasing that DeFi yield is more fluid and adaptive compared to CeFi related yield in general which tend to be more rigid and les adaptive. 

The chart below represents the comparison of historical rates across indexes since January 2022 and aims to provide some perspective on performance over time. For full historical performance of Coinchange Earn Account check here.

Methodology for DeFi Minimum Risk Rate

A benchmark is a standard against which something is compared. In finance, investors use benchmarks to measure the performance of securities, mutual funds, exchange-traded funds, portfolios, or other investment instruments.

Generally, broad market and market-segment stock and bond indexes are used for this purpose. If there is an investment instrument, there is a benchmark to compare it to, otherwise comparison across investment products alone does not provide the full picture.

In crypto, benchmarks do exist as well. The most common are the top 10 or 15 cryptocurrency indexes by market capitalization. DeFi benchmarks exist as well in the form of indexes, most of the time tracking the market capitalization of top DeFi governance token, which can be found for DeFi sub-segments such as DeFi yield, Oracle, GameFi, NFT marketplace, etc.

The benchmark we are seeking here, is one that could serve the same purpose as the “risk-free rate” that exists in traditional finance. In theory, the risk-free rate is the minimum return an investor expects for any investment while not accepting additional risk unless the potential rate of return is greater than the risk-free rate. Determination of a proxy for the risk-free rate of return will depend mainly on the credibility, liquidity size of the product, and availability. In practice, although a completely risk-free rate does not exist, the interest rate on a 10 year U.S. bond is often used as the benchmark for most investors while foreign investors might need to factor in the currency risk. 

In DeFi we can’t name such a benchmark “risk-free rate” since the technology it is built on is rather new and hence does not carry the same credibility as US T-Bill. Hence using “DeFi minimum risk rate” is more suited. Like in the TradFi market, DeFi has large investors seeking low risk returns in non-derivative markets which have high levels of liquidity with full redemption intraday. Protocols that fit the requirement are lending and borrowing protocols as per Credmark research. We should only take into consideration the rate of return of stable assets as the risk-free rate in TradFi is denominated in dollars. 

Hence the minimal risk rate in DeFi could be determined by taking the TVL weighted average rate for USDC, USDT and DAI - as they are the most stable with highest liquidity - on AAVE and Compound - as they are the most secure and longest standing protocols in DeFi with highest Total Value Locked (TVL).

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