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Methodology change DeFi Pulse Index: Rebalancing Frequency

Scalara announces a change to the methodology of the DeFi Pulse Index to be effective starting with the May 2022 rebalancing.

The DeFi Pulse Index is a digital asset index designed to track the performance of some of the largest protocols in the Decentralized Finance (DeFi) space.

Scalara has decided to change the ongoing maintenance rules that are part of the index methodology. The current rules in methodology v0.5 state that the rebalance takes place on a monthly basis.

The methodology update to v0.6 will adjust the DeFi Pulse Index rebalancing frequency from monthly to quarterly in January, April, July, and October. The rebalancing results become effective on the first business day of the following month. This change will become effective immediately. Therefore, there will not be a May rebalance.

The ongoing index maintenance will now state the following:

The index is maintained on a quarterly basis (in January, April, July, and October) in two phases:

The adjustment to quarterly rebalancing reduces the DeFi Pulse Index’s maintenance cost whilst still retaining its target exposure.

Related: Why Invest in an Index?

Why the adjustment to quarterly rebalancing?

The primary objective of a blue-chip index is to represent the economic reality of the underlying market. For the DeFi Pulse Index this target market consists of DeFi projects with significant usage, traction and integration. Rebalancing quarterly does not distort what the index seeks to represent. This is the case because a market cap weighted index like the DeFi Pulse index maintains its exposure automatically. Only component changes, changes in circulating supply, and capping require updates.

Turnover DeFi Pulse Index, rebalancing frequency monthly
Figure 1: One-way monthly turnover. Scalara data.

Since the introduction of the Minimum Weight Requirement and Flexible Capping, the monthly rebalancing turnover has decreased to 1-2%. This indicates that monthly rebalancing is not necessary to maintain target exposure. Turnover due to capping and issuance is not necessary every month. Especially the Minimum Weight Requirement implicitly increased the barrier for new additions. Figure 1 highlights the one-way turnover for the past few months. The April rebalance involved the extraordinary resolution of the RGT-TRIBE merger.

If the target exposure remains stable, it is optimal to reduce the number of rebalances. This is because each rebalance has a fixed cost associated with it. Hence, the maintenance cost of the index decreases if we reduce the rebalance frequency. 

In summary, adjusting the DeFi Pulse Index rebalancing frequency reduces the maintenance effort of the index. This can be achieved without significantly affecting its main objective of providing diversified exposure to blue-chip DeFi protocols.

Scalara, a subsidiary of DeFi Pulse, creates and maintains indices for a decentralized world.

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