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DeFi Pulse Index 2022 in Review

Finding anything positive in last year’s performance is a challenging task. We still give it a try.

2022 was a bad year for DeFi digital assets risk assets almost all asset classes. Record high inflation added further headwind to real returns. The DeFi Pulse Index, Scalara’s benchmark for the DeFi sector was no exception. The index fell 80% in dollar terms, compared to a 68% drop in the price of ETH.

The index ended the year with 10 constituents. It started the year with 17 index components but over the course of the year tokens with a negligible weight were removed or merged or were delisted.

The best and worst performers of 2022 based on the current constituents are show in the table below. To paint a slightly more rosy picture, returns are based on asset prices denominated in ETH:

Returns in ETH. Data source: Coingecko.

The overall annual return does not look good. But how did the index perform throughout the year?
Surprisingly, within 2022 there were several longer periods of strong positive performance, both in USD and ETH terms. From mid-June to mid-August the DeFi Pulse Index rallied 107% slightly outperforming ETH. These gains were lost by end of the year though.

DeFi Pulse Index in USD. 2022. Data source: Coingecko.

When measuring the DeFi Pulse Index in ETH there have been times of positive absolute performance as well. From mid-May to mid-July the index increased by 81% in ETH.

DeFi Pulse Index in ETH. 2022. Data source: Coingecko.

Lastly, we take a look at correlations as they are the drivers of diversification. The more uncorrelated two assets are, the greater is the reduction in risk when combining these two assets. The average pairwise correlation based on daily returns in 2022 was 0.67. This is somewhat higher than the average pairwise correlations seen in the S&P 500 that is typically in the order of 0.3 to 0.5.

DeFi Pulse Index pairwise correlations. 2022. Data source: Coingecko.

Happy New Year!

Scalara is dedicated to creating and maintaining indices for a decentralized world.

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