The Decentralised Finance (DeFi) segment of the crypto currency market has been one of the stars of this bull market, with many attracted by the promise of profiting from the liberation of finance. However, the Defi environment is not without its own unique set of risks.
Generally speaking, for one to truly reap the rewards of participating in this sector, a more hands on approach will serve one better than the simple buy and hodl Ethereum strategy that many crypto participants are already used to. ETH being the benchmark of Glassnode Insights’ research because the Ethereum blockchain is the stronghold of the decentralised finance revolution.
Glassnode’s research compares the difference in return that an investor stood to make from buying and hodling a basket of ETH, against an investment into a bag of top choice Defi assets – known as the DeFi Pulse Index (DPI), and active participation through yield farming. Specifically tracking the performance of yield farming with SUSHIi/WETH and farming stable coins on Yearn Finance.
Showdown Of The Investment Returns
The time span of the simulation is taken from the 1st of January 2021 until now, with an investment of $10 000 allocated to each of the four strategies that are being compared to one another.
In a basic comparison of the four strategies, Glassnode found that the SUSHI-WETH strategy gave the best performance during the given period of time – in part a result of the boost gained from SushiSwap rewards.
According to the results of the simulation done on Croco Finance, this specific strategy would have yielded a return of 326% on the initial investment of $10 000 – growing the capital to approximately $42,600. In comparison, simply holding ETH over the same period of time would have returned 298% on the investors capital, swelling their investment just shy of the top performer’s result at roughly $39,800.
However, it is important to note that this comparison is basic and does not account for a number of important factors that come with active involvement in the DeFi sector.
“In this simulation we ignore the SUSHI-WETH chop, assume immediate sale of rewards, and ignore the 6 month vesting period.” As noted in Glassnode’s research piece.
Interestingly, the next best performance against hodling the world’s second most popular digital asset came from yield farming stable coins on Yearn Finance – though only during specific periods of significant downwards volatility.
For the greater portion of the year, buying and holding ETH would have served an investor better than yield farming via Yearn’s yvDAI vault. This is because of Ethereum’s stellar performance this year. However, since the beginning of May, yvDAI has done better than the ETH buy/hodl strategy thanks to significant selling pressure. Being a risk-off strategy has its advantages during periods of bearish market action.
Lastly, the performance results of hodling a DPI basket may come as a surprise to many – especially when considering all the hype this sector generated. The DPI index failed to beat the returns generated by the simple ETH buy/hodl strategy, catching only 2.8x gains since the beginning of the year – while ETH hodlers enjoyed a 3.6x return.
The DPI’s performance was at its worst during March when the index shed 18%, while ETH climbed 30%. This is likely a result of a difference in the average volatility of the strategies being compared – the Ethereum market simply suffers less from volatility, probably a result of being better capitalised.
The Issue Of Volatility
Volatility is an important factor that every investor should consider and cryptocurrencies tend to hit very high scores in this department.
The DPI came out with the highest volatility level in this portion of the simulation at 14,20%. This was followed closely by the SUSHI-WETH strategy that averages 12.13% volatility. Hodling ETH was less of a bumpy ride at 10.03% volatility. For yvDAI, an inherently risk averse option, a volatility average of 1.40% is negligible when compared to the others.
In order to calculate the volatility of each strategy, “Standard deviation is most commonly used to measure this value; it is calculated using the square root of the variance of historical returns. Higher standard deviation means higher volatility.” As per Glassnode.
Conclusions
Thus far, the DeFi index has not been as good a performer as the ETH buy/hodl plan. On the other hand, active participation in the sector seems to be a more profitable route, while stable yield farming looks like a good shelter during times of downward volatility.
That said active participation carries higher costs to it than the simple buy/hodl. These costs include gas fees for token transfers, approvals, swaps, e.t.c. not to mention the responsibility of learning the ins and outs of the DeFi market.
