Why Allan Recommends Investing In The DeFi Pulse Index

Why Allan Recommends Investing In The DeFi Pulse Index

over 2 years ago3 mins

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Summary:

  • The DeFi Pulse Index tracks the value of the most popular projects in decentralized finance (DeFi).
  • DeFi projects are creating a parallel system of global finance and should flourish as adoption increases.

Tell us about yourself, Allan

I have recently broken into venture capital (VC) and currently work at a spacetech-focused VC fund. I started investing in crypto late last year and intend on playing the long game.

What’s the pitch?

A medium- to long-term investment in the DeFi Pulse Index (ticker: DPI). DeFi Pulse is the S&P 500 of decentralized finance (DeFi).

For the first time, crypto has found a product-market fit in the form of DeFi. 

Until the end of April, there was a steady growth in total value locked (TVL) for the Ethereum and Binance Smart Chain (BSC) networks. Growth stagnated in May as crypto prices tumbled. However, even though the TVL dramatically decreased in dollar terms, the value locked in terms of ether (ETH) or binance coin (BNB) has remained relatively constant. This shows an enduring appetite for DeFi.

What does the DeFi Pulse Index do?

The DeFi Pulse Index is a digital asset index designed to track tokens’ performance within the DeFi industry. The Index aims to track DeFi projects that have significant usage and show a commitment to ongoing maintenance and development. It’s weighted based on the value of each token’s circulating supply.

What’s your three-point investment thesis?

  • Crypto has finally found practical use cases in the current cycle, which was not the case in previous bull runs.
  • DPI offers significant exposure to the DeFi landscape, tracking the top projects in this space including Decentralized exchanges (DEXs), borrowing/lending protocols, and decentralised autonomous organizations (DOAs).
  • The scaling of Ethereum’s transaction throughput, while retaining the decentralization of the network without reliance on third parties, will enable a utopian vision for crypto beyond the “store of value” and “payments” use cases. It will allow the creation of an alternative and parallel global financial system.

What are the key events you’re watching?

Ethereum Investment Proposal 1559 (EIP 1559)

EIP 1559 flips a typical blockchain transaction on its head in order to fix numerous issues with Ethereum’s user experience. Traditionally, a user sends a gas fee to a miner for a transaction to be included in a block. That gas fee will now be sent to the network itself as a sort of “burn” – called a base fee – with only an optional tip paid to miners. The burnt fee is algorithmically set as well, ostensibly making it easier for users to pay a fair fee.

ETH 2.0

The proposed shift to proof of stake operation should expand the Ethereum network’s throughput from 15 transactions per sec to 4,000 in 2021 (via so-called rollups) and 100,000 by 2024 (via sharding). 

What’s the upside potential if your thesis is correct?

DeFi promises to make money and all services around money accessible to every single person with a smartphone and an internet connection. In 2020, total value locked in DeFi applications grew from about $700 million to nearly $15 billion. I believe Ethereum’s Market cap is set to exceed $1 trillion in the next 2-3 years – up from its current $250 billion – and this will allow DeFi projects to grow by 20-50x.

What are the big risk factors you’ve spotted, and how do you plan to mitigate them?

  • The DPI is run by a company called TokenSets and you are exposed to the counterparty risk of them going bust. You could avoid this by buying the DeFi projects individually based on their weighting in the DPI.
  • Moreover, exploits of smart contracts are an ever present risk for anything interesting in DeFi, especially TokenSets and the DPI. Ethereum itself is a network undergoing massive transformation and there is "platform risk" for all DeFi assets to take into consideration as well.
  • Lastly, crypto is an extremely volatile market.

Does the DeFi Pulse Index get your pulse racing? Let us know your thoughts on Allan’s pitch here.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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