New research shows that indexes based on DeFI tokens are not diversified enough for the advanced investor
The research states that the indexes are overexposed to some DeFi tokens, which invalidates the whole point of diversification. This makes them ‘bad’ investment options for advanced investors looking to manage their risks.
The DeFi boom, seen in the third quarter of the year, saw many indexes emerge in the sector. The idea behind the indices is to get broad exposure without doing the tedious job of buying the assets individually.
The popular analytics provider, DeFi Pulse, released its index in September, when the hype around DeFi peaked. However, Roberto Talamas, an analyst at Messari, believes that the DeFi Pulse Index relies more on some assets than others.
“The DeFi Pulse Index (DPI) now has more than 35 million in assets, showing greater demand for cryptographic indices. Although DPI is a good investment for beginners, it may not provide the diversification that sophisticated investors demand, leaving them overexposed to individual DeFi assets. ” him posted on twitter.
Talamas further stressed that, while these indices have the benefits of broad exposure and lower rates, they may be less than ideal. He argued that they often weigh heavily on some assets, thereby reducing the benefits of diversification.
The analyst studied the DeFi Pulse Index and, after evaluating the product, found that only four assets represent 77% of the portfolio. These assets are the Synthetix token which holds 13.29%, the Yearn Finance token which is responsible for 17.87%, the Aave token, which represents 20.18%, and the Uniswap token which controls 26.12 %.
Talamas highlights that any significant movement of any of these assets strongly impacts the performance of the index due to its immense contribution.
Interestingly, this analysis is true for many other DeFi indices. Synthetix’s sDEFI, for example, is concentrated with just four tokens. SNX, Compound, Kyber Network and Maker together account for about 60% of the portfolio.