An Introduction to DeFi Pulse Index Methodology

What is the DeFi Pulse Index?

The DeFi Pulse Index ($DPI) is a capitalization-weighted index that tracks the performance of decentralized financial (DeFi) assets across Ethereum. It combines the features of an ERC-20 token and a traditional index fund to create a 21st-century digital upgrade to the traditional ETF structure.

As a structured index product, $DPI follows a specific methodology created by DeFi Pulse, the organization that worked with Index Coop to create $DPI, when selecting tokens for inclusion and determining their weights in the index.

What are the DeFi Pulse Index inclusion criteria?

The token inclusion criteria considers a wide range of characteristics across four primary categories: descriptive characteristics, supply characteristics, traction characteristics, and user safety characteristics.

Descriptive Characteristics

• The token must be available on the Ethereum blockchain.
• The token must be associated with a decentralized finance protocol or dapp listed on DeFi Pulse.
• The token must not be considered a security by the corresponding authorities across different jurisdictions.
• The token must be a bearer instrument. None of the following will be included in the index: wrapped tokens, tokenized derivatives, synthetic assets, tokens that are tied to physical assets, and tokens that represent claims on other tokens.

Supply Characteristics

• It must be possible to reasonably predict the token’s supply over the next five years.
• At least 7.5% of the five year supply must be currently circulating.
• Token must have reasonable and consistent DeFi liquidity on Ethereum.
• The token’s economics must not have locking, minting or other patterns that would significantly disadvantage passive holders.

Traction Characteristics

• The project must be widely considered to be building a useful protocol or product.
• Projects focused on competitive trading/holding, having Ponzi characteristics, or projects that exist primarily for entertainment, will not be included.
• The project’s protocol must have significant usage.
• The protocol or product must have been launched at least 180 days before being able to qualify to be included in the index.
• The protocol or project must not be insolvent.

User Safety Characteristics

• Security professionals must have reviewed the protocol to determine that security best practices have been followed to maintain user assets safe under different circumstances.
• Alternatively, the protocol must have been operating long enough to create a consensus about its safety in the decentralized finance community.
• In the event of a safety incident, the team must have responded promptly and addressed the incident responsibly in the aftermath, providing users of the protocol with a reliable solution and the decentralized finance community with adequate documentation to provide transparency about the incident.
• The selected tokens must have sufficient liquidity across a variety of trading platforms.

How are token weightings decided?

The DeFi Pulse Index methodology weights tokens in the index according to their market cap based on circulating supply. Index constituents are capped at a 25% max allocation to avoid over-concentration. Any excess weight above 25% that would have been allocated to the token is redistributed to the remaining components of the DeFi Pulse Index on a weighted basis.

How is the DeFi Pulse Index maintained?

$DPI is maintained in two phases: a determination phase where tokens are added/deleted, circulating supply is assessed, and weightings are outlined based on the above methodology, and a reconstitution phase where the index composition changes from the determination phase are implemented. The determination phase typically occurs during the third week of the month, and reconstitution is enacted on the first working day of the following month.

For more on the benefits of this rebalancing process, check out How Automatic Rebalancing Will Power Long-Term Success. In addition, if you would like more details on the DeFi Pulse Index, you can check out our Definitive Guide to the DeFi Pulse Index.