Coinchange Asset Allocation Report September 2022

Hello Coinchangers,

Welcome to Coinchange’s first Asset Allocation Report where we provide information on how Coinchange deploys client 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's assets. 

This report covers the deployed assets across 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

As the liquidity and overall activity in DeFi decreased, opportunities that met our risk threshold (guided by our internal risk framework and threshold) required more development. The level of volatility in the market over the past months has impacted some of our strategies with exposure to protocol-based liquidity incentives, as the underlying value of rewards declined.

To address the impact of decreased liquidity and activity, we have launched several non-correlated strategies. These strategies will first enable the stabilization of stablecoin rates and, in the near future, capitalize on the market outlook to substantially increase the average rate.

For more information on the state of the market and DeFi, read our DeFi Research News September 2022. 

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 based on proprietary financial models and represent automated systems that rebalance funds in the DeFi ecosystem in accordance with the models and in response to changing market conditions. Strategies developed by Coinchange fall into the following areas of the DeFi ecosystem.

Liquidity Provisioning (LP) Strategies

LP strategies are based on participation in DEX protocols (Decentralized Exchange). 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 aim to maximize yield while keeping the strategy market-neutral.  Complex hedging and proprietary algorithms are used to maintain a market-neutral position and eliminate the risks associated with LP pools that involve non-stable coin currencies such as Ethereum. In addition, Coinchange strategies take full advantage of the additional staking of reward tokens provided by associated AMM 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 optimal collateral levels (with respect to liquidations), stack multiple borrow/lend cycles, and include reward tokens in the yield cycle.

Coinchange also utilizes complex strategies that earn on arbitrage opportunities in the lend/borrow protocols. These strategies benefit from faster markets with higher levels of activity and volatility.

Staking Strategies

Staking strategies take advantage of specialized opportunities where staking is the primary mechanism for yield generation. One such strategy takes advantage of the pegged nature of staked Ethereum and uses it to boost the returns of regular Proof-of-Stake Ethereum staking.

Coinchange only deploys assets using quality, widely used, and time-tested DeFi protocols. Below is a list of protocols used in Coinchange strategies:

• AAVE v2-3
• Uniswap
• TraderJoe
• Pancakeswap
• Curve
• Venus
• BenQi
• 1Inch
• Platypus
• 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 clearly shows a high bias 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 the Coinchange portfolio’s structure and the diversification of market mechanisms in the portfolio.

DeFi Protocol Type Groups

DEX: Decentralized Exchange Protocols (aka AMM and LP)

• Uniswap v2
• Uniswap v3
• TraderJoe
• Pancakeswap
• Platypus

MMP: Money Market Protocols (Lending and Borrowing)

• Aave v2
• Aave v3
• Compound
• Venus

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 of 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 55.1% of stablecoin deployments are in MMP protocols. MMP protocols provide a relatively constant and stable yield given current market environments.

32.2% of deployment is allocated to the DEX protocols. The yields on DEX protocols benefit from higher market activity and volumes. This allocation aims to capitalize on the steady but gradual recovery in DeFi markets and a gradual increase in trading activities.

12.7% of deployment is allocated to staking protocols. Coinchange strategies based on these protocols have an attractive risk/reward ratio in the current market environment. There are, however, higher transaction costs to consider, and this is reflected in the proportionate allocation percentages.

The chart below shows the resultant strategy for 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 the Coinchange portfolio is well diversified across blockchains, which is another important risk mitigating factor in the risk profile of the portfolio.

Volatile Asset under Management Breakdown

Managed Asset Mix

The graph below shows the asset mix of Bitcoin and Ethereum in the Coinchange client asset portfolio 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

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.

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

What the 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, frameworks, 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 is working on:

Areas of Research:

• Security improvements: We’ve developed a new security framework (embedded into the new version of our execution engine) and further improved it to make it fully trustless
• Universal backtester: We created a set of tools to model and calculate the exact characteristics of the potential strategies to be developed.
• Data grabbing: more new protocols to be supported.

New Protocols and Strategies:

• BenQi finance, Cream finance, new Trader Joe Uniswap v3 like DEX, Opyn/squeeth
• More hedging strategies, chain carry trade strategies (the sequence of lending/borrowing protocols), the use of Squeeth, Uniswap v3

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.

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