The Diversification of DeFi
The 100 Acre Ventures DeFi Opportunities fund uses a systematic rules-based approach to capture the holistic decentralized finance (“DeFi”) opportunity set. The current constituents represent 95% of the economic activity within DeFi as measured by net fees and capture the lion’s share of activity as measured by trading volume and deposits (total value locked). The fund does not hold Bitcoin, Ethereum, or Solana and only invests in DeFi applications or DeFi-centric app-chains.
Historically, the market has made an informal distinction between Bitcoin and alternative tokens or “alts”, the latter being a catch-all term for everything from DeFi tokens, which are now seeing significant real-world applications, to meme tokens, which are entirely speculative. Decentralized finance applications are those that offer services or primitives that enable or facilitate trading, borrowing/lending, asset issuance, and other services commonly associated with finance or asset management. As the DeFi segment matures, we expect sector-specific narratives and fundamentals to become a bigger driver of valuations, and we’re observing this trend empirically.
Bitcoin has benefited from the digital gold narrative and the increasing likelihood that it will become an alternative reserve currency. There is discussion in the US about creating a strategic bitcoin reserve and many other countries have announced or hinted at similar plans. There are also many states whose pension funds have allocated to Bitcoin, as well as corporates who are now actively adding it to their balance sheets or evaluating doing so. The Bitcoin ETFs illustrate this demand, having attracted more than $40B in assets since launching one year ago. Bitcoin Treasuries is a good resource for tracking these holdings by sovereigns and corporates.
Ethereum and Solana are the most established and recognized platforms enabling permissionless applications to be built on top of them and currently host the majority of DeFi activity. Contrary to popular belief, many DeFI applications generate significant cash flows in the form of fees that are distributed directly to token holders, or a DAO governed by those token holders, which in turn drives the token’s price. The fund weights constituents on the basis of several factors but places a large emphasis on net fees as a proxy for adoption. Here are the top fund constituents as ranked by trailing 90d net fees.
While there is generally positive correlation across the digital asset space, there are significant differences in the narrative and demand drivers for Bitcoin vs. decentralized finance applications. With increased adoption and improved token models that have equity-like characteristics, we’re seeing lower correlations and a greater diversification benefit for DeFi within a crypto portfolio that has exposure to the majors (Bitcoin, Ethereum, Solana).
The average 60-day pairwise correlation between BTC and the equal weighted basked of DeFi assets in the SOL ecosystem is 0.545
The average 60-day pairwise correlation between BTC and the equal weighted basked of DeFi assets in the ETH ecosystem is 0.530
There is also large divergence in performance between the DeFi applications across the different ecosystems, the two largest being Ethereum and Solana. Competition between applications that are competing for share within a specific sub-sector as well as ecosystems that are competing for overall market share are one driver of this diversification. As an example, the correlation between Solana and Ethereum DeFI ecosystem baskets has ranged between .51 and .55 over the last 90 days. The average pairwise correlation between the current fund constituents is also quite low:
30-day average pairwise correlation of fund constituents: 0.549
60-day average pairwise correlation of fund constituents: 0.526
90-day average pairwise correlation of fund constituents: 0.489
The low correlations across the DeFi universe highlight the diverse underlying fundamental drivers of price and the opportunity for portfolio diversification.
The fund’s ecosystem and sector composition varies over time and is driven by its fundamental weighting methodology (100 Acre Ventures DeFi Opportunities Fund Primer) which emphasizes protocols that generate positive net fees and demonstrate growth in net fees. This results in exposure to the blue chip DeFi names as well as smaller names that are demonstrating high growth. New entrants such as Hyperliquid (derivatives) and Morpho (lending) have the potential to take share from current incumbents and have had differentiated returns in recent months. Hyperliquid is unique in that it launched as a purpose built app-chain hosting a derivatives platform (for which it is now the dominate player with 5-8x the volume of the nearest competitor), but is now expanding offering sport trading, token launches, and will soon allow for the development of additional applications to be built on top of it and will compete with more generalised layer one protocols like Ethereum and Solana.
In the month of December there was a lot of performance dispersion among fund constituents, ranging from -37.2% for INJ and -29.6% for JUP on the low end and +174% for HYPE and +128.3% for MORPHO. HYPE is the largest decentralized derivatives platform, and as of the end of December it had experienced $283B in 90d aggregate trading volume and generated $85M in 90d trailing fees, representing month-over-month fee growth of 38%. MORPHO, a lending platform, likewise has shown significant growth in fundamental metrics, with total platform deposits increasing 2.85x over the trailing 3mo period, from ~$1B at the end of September to $2.85B at the end of December. These strong fundamentals drove the idiosyncratic performance of these names which were the top two contributors to fund returns during a month where the majors were flat to down (BTC -3.23%, ETH -10.07%, and SOL -20.39%). Not surprisingly, these assets have demonstrated the lowest 60d correlation with BTC at 0.29 and .09 respectively. As the chart below shows, many assets in the decentralized finance opportunity set are demonstrating low correlations with both the majors and each other, which provides an opportunity for diversification.
The end result of divergent narratives and a highly competitive landscape between DeFi sectors and ecosystems is a relatively low correlation of the fund vs. Bitcoin, especially over longer horizons. For the most recent date (January 28, 2025), the trailing correlations between the DeFi fund and BTC are:
30-day correlation: 0.768
60-day correlation: 0.693
90-day correlation: 0.636
We expect the pairwise correlation to continue to remain low and the diversification benefit to only increase as the protocols become more mature. Given that the fund does not invest in BTC, ETH, or SOL and only DeFi applications, we expect that the fund’s correlation will remain differentiated from the majors.