Abstract
Decentralized Finance (DeFi) is a nascent set of financial services, using tokens, smart contracts, and blockchain technology as financial instruments. We investigate 3 possible drivers of DeFi returns: exposure to the cryptocurrency market, the network effect, and the valuation ratio. As DeFi tokens are distinct from classical cryptocurrencies, we designed a new dedicated market index, denoted iDeFiX. We compare our index with the one created by Nasdaq and obtain similar results. First, we show that DeFi tokens returns are driven by their own network variables and the cryptocurrency market. We construct a valuation ratio for the DeFi market by dividing the Total Value Locked (TVL) by the Market Capitalization (MC). Our findings do not support the assumption regarding TVL/MC exposure. Overall, our empirical study shows that the impact of the cryptocurrency market on DeFi returns is stronger than any other considered driver and provides superior explanatory power.
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