Crypto Conversation: Taking the 'Pulse' of Decentralized Finance Tokens

DPI is an index of select crypto tokens.
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What’s hot in crypto this week? 

It's $DPI. DPI stands for DeFi Pulse Index. DeFi, remember, is short of decentralized finance. It was launched in September as a permission-less index of the very best decentralized finance tokens. The idea is that by buying DPI, users can get exposure to a curated set of decentralized finance projects, without paying gas fees for each. 

The index has 10 tokens: LEND, YFI, COMP, SNX, MKR, REN, KNC, LRC, BAL and REP. That order is arranged from the largest portion of the index (LEND at 18.3%) to the smallest (REP at 1.63%). 

Why?

Everyone is talking about $DPI as the new yield farming token, because it is a very easy and cheap way to get exposure to key decentralized finance tokens. It is directly integrated with Uniswap, so users can contribute $DPI liquidity and earn trading fees or yield farming rewards.

Indeed, automated market makers (AMMs) like Uniswap, Balancer and Curve account for a significant portion of the recent boom in decentralized finance. These rely on liquidity providers (LPs) — people and entities committing their capital in liquidity pools to facilitate trades and lower slippage. In return, LPs obtain trading fees paid by users. 

As with anything in crypto, large price fluctuations present a risk for investors, who continuously buy as the price drops and sell as the price rises. The bet they are making is that there will be enough back-and-forth trades to generate fees that compensate for the losses. 

What’s Flipside Crypto’s take? 

Flipside Crypto is focused on the largest pools, in terms of volume deposited that have existed for at least 30 days. These all belong to uniswap, which is an AMM that provides liquidity based on a very deterministic formula. It holds no money of its own, but can raise money from decentralized investors who then share the profits. 

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Investors are required to supply an equivalent value of the two assets in the pool they choose. For example, if they supply $100 worth of ETH in the ETH-DAI pool, they also have to supply $100 of DAI. 

But this ratio is going to change following movements in the market. Impermanent loss refers to how much investors would lose at a current point in time if they withdrew their money from a pool where the price of one of the assets went down. This loss becomes permanent as soon as investors withdraw their funds. 

There is a clear incentive for providing liquidity. Uniswap allows for the trading of ETH and ERC-20 tokens, and charges a 0.3% trading fee on all its pools. So to not get wrecked, most liquidity providers pick a pool that presents the most demand (the higher the volume, the higher the fees it generates), and the lowest risks. 

It therefore makes sense to see WBTC (wrapped BTC) -- WETH (wrapped ETH) at the top, with a total volume of $895 million, since those are the two largest blockchains in terms of market cap. 

The second largest pool is USDC (Coinbase’s stablecoin)-WETH (wrapped ETH) with $663 million in total balance. Pools that include a stable coin and an asset that is likely to increase are especially desirable, because they are the most likely to generate a profit. 

Most pools that are currently at the top are seeing an increase in daily volume. The most prominent is the DPI-WETH pool, whose 24 hour volume increased by nearly 200% in the past month.

The Flipside Crypto Asset Score Tracker provides institutional and sophisticated retail investors the ability to track over 500 cryptocurrencies' fundamentals. FCAS Tracker is currently free to a select group of new users as it continues to develop the product. Visit Flipside here to gain access to Flipside Analytics.