Coinchange Asset Allocation Report on Stablecoin & Volatile Assets September 2023

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 will be 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 protected].

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Market Outlook

In September, the TVL slightly increased in dollar terms from around $37.8B to $38.4B for the whole DeFi market. DEX 30day volumes have significantly dropped in dollar terms from August at $44.6B to $35.2B in September. Stablecoin market cap stayed flat at ~$125B with the top two USDT ($83B) and USDC ($25B) accounting for about 85% of the total market cap.

Here are the rankings of decentralized finance (DeFi) projects based on Total Value Locked (TVL). TVL is a measure of the total assets locked in a DeFi protocol:

• Lido Finance has held the number one spot in terms of TVL since January of this year, surpassing the previous leader, MakerDAO. Lido Finance's TVL is approximately $14.1 billion.
• MakerDAO and AAVE have been competing for the second and third spots, each having a TVL close to $4.4 billion.
• Arbitrum Bridge is in fourth place with a TVL of $4.2 billion.
• Uniswap is in the fifth position with a TVL of around $3.1 billion.

Asset allocation have undergone a change in strategy starting in August to position the portfolio to benefit from the upcoming uptick in trading volume on DEX that might soon follow after Bitcoin price volatility. It now has a minority deployment in MMP based strategy. USDC and USDT have decoupled with client favoring deposits in USDT in September similar to the report in August.

We recommend reading our DeFi Research News September 2023 for more insight on the markets. To learn more about where Coinchange rates stand compared to the industry, read our Yield Index report August 2023 or the Yield Index report September 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, Pangolin 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 ETH. 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 interest fluctuations.

Staking Strategies

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. Such strategies are portable crosschain and can use any Liquid Staking Derivative token (LSD).

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
• TraderJoe
• Pancakeswap
• Sonne Finance
• Venus
• BenQi
• 1Inch
• Pangolin
• Lido

Stablecoin Assets under Management Breakdown

Managed Asset Mix

Below is the distribution of client stablecoin assets managed on the Coinchange platform as of September 30th. Coinchange accepts USDC, USDT and DAI on the Ethereum network. The distribution shows that USDT is slightly preferred over USDC by clients.

Stablecoin Asset Allocation Breakdown per DeFi Protocol Type

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-v3
• TraderJoe
• Pangolin

MMP: Money Market Protocols (lending and borrowing)

• Aave v2
• Aave v3
• Compound
• Venus
• Sonne Finance

Staking: Staking Protocols for Governance and Blockchain Tokens

• BenQi
• Lido

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 allocation completely changed from August with 60% of stablecoin deployments being in MMP protocols. MMP protocols provide a relatively constant, stable yield given current market environments while benefiting from increases in borrowing demand caused by spikes in volatility both in uptrend and downtrend.

40% of stablecoin deployment is allocated to the DEX protocols as of September 30th. The reason being that a new DEX strategy has been launched with a proven track record on other portfolios, given current market conditions and requirements being met for the algorithm.

0% of stablecoin deployment is allocated to staking protocols. The Staking strategy has not been resumed since January 2023 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 deployment of assets. On the other hand, the Shanghai upgrade and recent upgrade of Lido enabling withdrawal will provide serenity to markets for the upcoming months, which might prompt a new allocation to ETH-LST strategies.

Stablecoin Asset Allocation Breakdown per Strategy

Each strategy takes different metrics as input to determine the best asset allocation on a pool basis in order to achieve optimized risk to reward ratio across the portfolio. 

The portfolio of stablecoin strategies treats all stablecoin as one unit of account since our internal due diligence, historical and current volatility analysis has shown that each of them could be securely and safely changed for one another under normal market conditions. This explains the discrepancy that can arise between the asset received breakdown above and the asset allocation break down per Earn Account.

The pie chart below provides an overview of the stablecoin asset distribution in the different related Earn Account at Coinchange. It is important to note here that each Earn Account can have multiple strategies earning for the specific asset. 

A significant rebalancing happened in August with all of the asset being deployed using USDC as the deployment asset. USDT isn’t being used for deployment as per strategy deployed requires usage of USDC as primary asset. DAI allocation is 0%, which has been the case since December 2022, as too few strategies earning with DAI prove to earn sufficiently high APY to motivate an asset allocation. 

Stablecoin strategies:

Strategy: Lending loop

• Protocols used: Sonne Finance
• Currency used as input: USDC
• Blockchain: Optimism
• Earning: Lending rate, Token incentives
• % of all stablecoin asset deployed: 60%

Strategy: FlashCarry

• Protocols used: AAVE, Curve
• Currency used as input: USDC
• Blockchain: Ethereum
• Earning: Lending rate, Token incentives, Staking rate
• % of all stablecoin asset deployed: 0%

Strategy: Hedging Strategy

• Protocols used: Pangolin, AAVE
• Currency used as input: USDC
• Blockchain: Avalanche
• Earning: Trading Fee, Token incentives, Staking rate
• % of all stablecoin asset deployed: 40%

Below is a pie chart highlighting the stablecoin asset allocation per strategy as of September 30th. Essentially another way to visualize allocation shared in the list above.

Stablecoin Asset Allocation Breakdown per Blockchain

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 strategies operate in one blockchain only.

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 September 30th. Ethereum yields have historically been much stronger than Bitcon yields, which may explain a clear preference to invest in Ethereum. 

Volatile Asset Allocation Strategy

Similar to January, allocation for both currencies (ETH and BTC) is 100% in MMP (Money Market Protocols). MMP type protocols are preferred for volatile assets and especially in the current market environment as they provide a fairly constant and stable yield.

MMP protocols, which host 100% of Coinchange ETH and BTC assets, are running on the Optimism blockchain.

Volatile Asset Allocation Breakdown per Strategy

Each strategy takes different metrics as input to determine the best asset allocation on a pool basis in order to achieve optimized risk to reward ratio across the portfolio. 

The portfolio of volatile asset strategies treats all volatile assets separately compared to stablecoin where they are treated as one unit of account. This means that volatile assets can’t be traded one for the other when rebalancing the strategies and also explain that there is no discrepancy between the Asset Managed Mix above and the asset allocation breakdown per Earn Account below.

The pie chart below provides an overview of the volatile asset distribution in the different related Earn Account at Coinchange. It is important to note here that each Earn Account can have multiple strategies earning for the specific asset. Currently we only have 1 strategy for each asset. 

Volatile crypto: Bitcoin, Ethereum

Strategy: Lending loop

• Protocols used: Sonne Finance
• Currency used as input: BTC, ETH
• Blockchain: Optimism
• Earning: Lending rate, Token incentives
• % of all volatile asset deployed: 100%

• BTC: 10.7%
• ETH: 89.3%

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 and improvement. 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 has worked on the past few months in 2023:

Quant research and development:

• The research done on the cornerstone carry trade sequencing algorithms using algorithmic genetic approach has been completed and fully developed in March
• Research on new protocol types to expand our strategy possibilities and portfolio diversification both vertically - strategy deployment on new protocol primitive, and horizontally - strategy cloning across protocol and blockchain have been finalized with select strategies being actively developed which should be ready for deployment in the coming months.. 
• The universal backtester is extensively used for our algorithms. We currently actively monitor 21 pools for LP Hedging strategies with half stablecoin and 9 pools for LP Hedging strategies with volatile assets since March.
• Portfolio attribution and dashboard for the non-custodial product have been developed which will allow the platform to be open to external portfolio managers in a non-custodial manner.

Technology improvements:

• We architectured and developed our non-custodial framework of smart contracts.With this framework, the fund flow is fully transparent and the management of the smart contract is fully on-chain, paving the way for what Coinchange future might look like. Main difference for clients compared to the custodial product are:

• The client receives an NFT, proving that a deposit has been made to the vault. 
• The client is able to monitor its funds and all transactions happening with the vault directly on-chain. 
• Ownership of the funds remain with the client and withdrawals can be initiated anytime the client wants. Withdrawal can be conditioned to specific features, which can be enabled or disabled, such as lockups or cooldown periods. 

• To enable withdrawal for the non-custodial product, we’ve upgraded the services in charge of such tasks to be smart contracts. Now all withdrawal and subsequent rebalancing are all done using on-chain smart contracts without any off-chain services interaction. 
• Algorithms that allow full automation of all families of strategies developed in March as fully utilized. Specifically, new centralized services including strategy registry, in/out service and performance attribution service.

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.