Home Coins PieDAO DEFI Small Cap (DEFI+S) Announcing Balanced Crypto Pie (BCP): BTC, ETH and DEFI | by Will...

Announcing Balanced Crypto Pie (BCP): BTC, ETH and DEFI | by Will Brealey | PieDAO | Dec, 2020

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Will Brealey

The PieDAO community has been prioritising accessible automated investing strategies since day one. We believe the future of finance is passive and are committed to building products that make investing easy and minimise risk.

Today we hit a major milestone on our road to becoming the one-stop solution for automated, permissionless and risk-minimised cryptocurrency investing.

BCP provides complete exposure to what our community believes are the core must-own assets in cryptocurrency, an even 33.33% distribution between $BTC, $ETH and DEFI.

Backtesting demonstrates that the more diversified a portfolio, the more risk is reduced.

This was the driving force behind BCP’s design, a portfolio suitable for anyone looking for the safest cryptocurrency exposure.

As the most diversified cryptocurrency index available to date BCP gives users total peace of mind. Buy or issue BCP tokens and sit back and relax as your complete cryptocurrency portfolio automatically rebalances.

We conducted a thorough investigation into just how effective BCP is as a risk-minimised portfolio.

Before diving in let’s take a look at BCP’s design.

Bitcoin (BTC):
Crypto’s first mover, market leader and the most widely adopted decentralized digital asset. Its market-cap reflects its dominance.

Ether (ETH):
The undisputed champion of smart-contracts, enabling limitless possibilities to do more with your money. The backbone of DEFI with a clear roadmap to scalability and greater decentralization well underway.

DEFI (DEFI++):
DEFI (decentralized finance) is an emergent ecosystem of projects built on Ethereum rapidly making traditional finance obsolete. Lend, borrow, earn, stake and much more, truly permission-less and accessible to anyone, from anywhere, at any time.
DEFI++ is a PieDAO product, our community’s interpretation of the most innovative and market-leading large and small market cap defi projects. The most diversified DEFI index on the market.

Operation

BCP is constructed using a Balancer smart pool. When a user issues BCP tokens the underlying assets are bought from decentralised markets or sourced from the user’s wallet, and sent to our non-custodial treasury. As market prices fluctuate the pool rebalances in real-time, constantly locking in profits.

The pie is constructed from three ERC-20 tokens.

BTC = $WBTC, the most liquid tokenized BTC asset on Ethereum. This will likely be updated as truly non-custodial solutions gain liquidity.

ETH = $WETH, a wrapped ERC20 version of Ether.

DEFI = $DEFI++, the most diversified DeFi index on the market, a 70/30 balance of our DEFI+L and DEFI+S indices (read all about DEFI++ here).

We conducted a thorough backtest examining how BCP would have performed over the last 7 weeks in comparison to each underlying asset. You can see the benefits of diversification from the image below.

The results confirmed BCP would outperform the majority of crypto positions, providing a staggering 65.73% return over just 48 days.

While this is impressive, the focus of this pie is diversification

In light of this we conducted an investigation into the correlation and risk of $BCP’s underlying assets for the past seven weeks (October 7th — November 24th).

Uncorrelated Assets

Indices perform best when composed of uncorrelated assets, so just how well would our Balanced Crypto Pie have fared?

The table below gives a score to each asset pair, with the lower number indicating reduced correlation.

$BCP’s correlation matrix demonstrates that $WBTC has a very low correlation to most represented DeFi assets, and was in some cases negative.

A majority of DeFi assets on the other hand indicated a mid-to-high cross-correlation over the chosen period. These assets also demonstrated a clear correlation with ETH, with exceptions being $MLN, $UMA, $YFI and $REN, which show a low or mid-to-low correlation.

In summary BCP is marked improvement over existing products from this analytical lens, which should generate better results and greater risk-minimization. While this is true, there is still clear correlation between key asset groups in the pie.

Equal Risk

The risk analysis further assessed the assets’ covariance and overall portfolio standard deviation as a measure of its risk. We also highlighted the Marginal Contributions to Risk (MCTR) of each underlying asset to $BCP’s overall risk.

The table below recaps the results, breaking down $DEFI++’s underlyings to emphasize their individual % MCTR.

While it’s apparent how $BTC contributes with very low MCTR when compared to its allocation, DeFI++’s Equal Risk Taking for the period under analysis may point out a higher-than-optimal risk concentration around two assets. $AAVE & $YFI both recorded a higher-than-normal volatility on that specific period, however these assets still accounted for less than 8% MCTR each. While this analysis identified Ether as the portfolio’s highest risk asset, Ether’s marginal contribution to the pie’s risk still remains proportionally smaller than its portfolio allocation.

Analysis Summary

In the period under scope the resulting portfolio standard deviation for $BCP was just 20.73%. This, together with the 65.73% return scored over just 48 days (representing a staggering 499.8% annualized), would indicate a beyond-excellent Sharpe Ratio of 3.17. This analysis is deeply affected by the recent bullish trend and it would be unreasonable to extrapolate and annualize this return. While past performance is not indicative of future returns, over the period investigated the results are compelling.

From a theoretical standpoint the portfolio risk could have been further optimized by introducing a small cash allocation: this would have further reduced the portfolio stdev while slightly eroding the portfolio returns. The resulting allocation would have likely resulted as suboptimal for value creation during bullish trends of DeFi, while could represent a viable option for future rebalancings in preparation for bearish cycles.

From both a correlation and risk perspective BCP is a marked improvement on existing market products and represents a big step forwards for diversified, passive and permissionless cryptocurrency portfolio strategies.

BCP is now live and you can buy or issue it from our website.

It’s also possible to issue BCP gas-free using our brand new Oven.

The Oven is the Cheapest way to mint Pies.

Pool your Ether with other users and when the Oven is full the contract will trigger, minting the tokens and distributing them accordingly.

Get your BCP today for complete exposure to the most important cryptocurrency assets.

Last but not least, the liquidity provided to BCP shall start receiving soon $DOUGH incentives, according to a new reward program to be voted in by the DAO. Join our Discord for more!

BCP has been the result of dedicated community effort, initially proposed by valued community member Jnova.

If you have an idea for a pie then head over to our Discord or Forum and let us know.

We are an open community of contributors based around the world, so get involved today.

Enjoy your pie everyone!

The PieDAO is a decentralized organization dedicated to bringing market accessibility and economic empowerment to anyone with an internet connection through Pie Protocol. Anybody in the public community may support these efforts by completing bounties, making feature requests, or proposing new Pies. DOUGH token holders are the DAO’s decision-makers, governing which proposals are accepted. If you want to know more about PieDAO:

PieDAO on Aragon

PieDAO website

Discord

PieDAO Forum

Official Documentation

Github

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