Yield Indexes and Benchmark Comparison - Stablecoin Assets October 2022

This document is updated each month and provides information and a comparison of Coinchange yield against different comparable indexes. We selected the components within the indexes to be direct, indirect or closely related to yield generation (DeFi and CeFi) and interest generation while maintaining strict requirements on funds availability, little to no minimum investments and high liquidity for USDC, USDT, DAI.

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We also provide a historical comparison of the rate across the indexes to provide some perspective on performance over time.

Yield Indexes

October Comparison

The chart below provides a snapshot of the rate across indexes and standalone rate for the month of October. We then explain 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 (Oct 1-31) for USDC, USDT and DAI. The exceptions are the DeFi Minimal Risk Rate (DMRR) which uses a TVL weighted average, and Coinchange which uses a weighted average rate (explained below).

We organize the indexes into 3 categories of risk. 

• Minimal risk: Risk-Free Rate adjusted and non-adjusted 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.

For the month of October, Coinchange has a higher average rate than all of the indexes and benchmarks while not having not having any lockups, minimum investments requirements and being fully liquid. At the end of the month we saw a couple of Centralised Lenders and hedge funds getting liquidity crunched, leading to fear spreading throughout the market. We recently published a blog covering the FTX/Alameda debacle and one explaining the difference between CeFi lending and DeFi lending.  These recent events are exacerbating the contagion to Centralised platforms that started with Terra and 3 Arrows Capital a couple of months ago. 

Indexes Legend 

Minimal Risk Indexes:

DeFi Minimal Risk Rate (DMRR) 

• Calculation method: TVL weighted average lending rate for USDC, USDT, DAI
• Index components: Compound and AAVE
• Requirements details: Markets are fully liquid (can be withdrawn within minutes) without minimum investment with highest liquidity in DeFi.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.

Risk-Free Rate non-adjusted for inflation

• Calculation method: Average 10 year U.S Treasury note yield, not adjusted for inflation.
• Index components: 10 year U.S Treasury note 
• 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 minimal 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. 

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

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Low Risk Indexes

DeFi Lending Index 

• Calculation method: Average stablecoin lending rate (USDC, USDT, DAI)
• Index components: AAVE, Compound and Venus
• Requirements details: The markets are fully liquid (can be withdrawn within minutes) without minimum investment and have among the highest liquidity in DeFi. 
• Risk information: The main difference between the DMRR and DeFi lending 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. 

Coinchange Yield

• Calculation method: Weighted average stablecoin rate (USDC, USDT, DAI) across diversified & non-correlated DeFi strategies.
• Index components: Coinchange
• 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 as well. Learn more in our Asset allocation report for September and October.  

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

Medium to High Risk Indexes:

CeDeFi Yield Index 

• Calculation method: 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 risk can vary from Low risk like Coinchange to medium and high risk with Swissborg or Spool Finance. The primary risks are bankruptcy due to poor asset management practices with either too much leverage or lack of safeguard measure in place.

DeFi Yield Index 

• Calculation method: Average stablecoin rate (USDC, USDT, DAI) 
• 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 high liquidity 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. 

CeFi Yield Index 

• Calculation method: Average stablecoin rate (USDC, USDT, DAI)
• Index components: Centralized companies generating yield via lending interest, primarily: BlockFi, Nexo, Circle Yield (3-6-12 month terms), TrueFi, Maple Finance public pool, Goldfinch senior pool. 
• Requirements details: BlockFi and Nexo do not have lockups or investment minimums but they do have an investment maximum of $20k and $100k respectively after which, the rate decreases dramatically. Those standard “retail rates” have been selected for the index. Nexo offers higher yield if choosing to earn in $NEXO rather than in kind along with holding a certain percentage of your portfolio value in the token indefinitely over time. Circle Yield has investment minimum of $100,000 and only offers yield on fixed term of 1-3-6-12 months without the possibility of withdrawing prior to the end of the term.
• 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 and the platforms that were using them via API to provide yield to their own client. More recently, BlockFi in November, paused  withdrawals. 

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

Performance Overview

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.

We provide a comparison of the rate across risk categories. Coinchange’s historical stablecoin weighted average rate, further attest that our strategies are outperforming the traditional benchmark (i.e: Risk-Free Rate adjusted and non-adjusted for inflation), DeFi native benchmark (i.e: DeFi Minimum Risk-Rate) while being consistently above the other indexes (i.e: DeFi Lending Index; CeDeFi Yield Index; CeFi Yield Index; DeFi Yield Index).  

Coinchange stands out as it is able to achieve such performance in a risk managed manner. We further explore our strategies diversification and allocation across protocol types in our monthly asset allocation report for September and October. 

Although investors with other local currency than the dollar will need to factor in the currency risk that our product has for them since Coinchange does not accept other fiat currency than dollars at the moment. But, soon investors holding EUR will not be exposed to currency risk as our team is implementing EUR on-ramp. 

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 minimal 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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