Aquanow Announces New Tools to Evaluate Risk and Return in Decentralized Finance

What problems are solved by the Index?

In traditional financial markets, benchmarks provide a standard measure of an asset class’s risk and return against which similar securities are compared. Aggregations of benchmark assets with common features are called indices. There are several composites designed to measure the aggregate bond market and its various sectors (government, municipal, corporate, etc.). Widely known fixed income indexes include the Bloomberg Barclays U.S. Aggregate Bond Index, which tracks the largest debt issuers in the U.S., and the Bloomberg Barclays Global Aggregate Bond Index, which tracks the largest borrowers globally. New composites are often created as novel asset classes arise and investor interests evolve. For example, as demand for developing market securities grew, J.P. Morgan created its Emerging Markets Bond Index in 1992 to provide a standard for portfolios of developing country debt. (Source) The Aquanow DeFi Funding Index is an innovation to capture the subtleties of protocol-based lending markets.

What about the Rate?

In addition to the Index, we believe it’s important to publish the weighted-average spot rate across the decentralized pools for lending non-algorithmic stablecoins. While the former serves as an important tool for evaluating the performance of assets & portfolio managers engaged in DeFi lending, the prevailing rate helps inform in other ways. Benchmark or reference rates are most often used to reflect the cost of borrowing money in different markets. For example, they might reflect how much it costs for banks to borrow from each other (LIBOR or now SOFR). Alternatively, they might indicate the cost of debt in a decentralized pool of capital.

How can we frame the Aquanow benchmarks in the context of the Terra/Luna collapse?

Last week, we witnessed a systemic event in digital asset markets, when the $20B market cap UST broke its peg, and by way of its stability mechanism minted trillions of the Terra blockchain’s governance token, Luna. Hundreds of billions of dollars were lost across the space and many investors were wiped out entirely.

How does Aquanow select constituents for these benchmarks?

For a complete description of the Aquanow DeFi Funding Index and Rate, please see our whitepaper here.

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