October 3, 2022
One of the many challenges institutions looking to enter decentralized finance have is navigating the complexity of the ecosystem and the wide range of data that needs to be understood.
Because of the nature of DeFi and the underlying technologies, you need four data lenses to identify potential opportunities, develop trading strategies, and make fully informed investment decisions. These are:
- Protocol level
- Pool level
- Asset level
- Wallet level
What Information Does Each Data Lens Provide?
Each data lens provides information about a different aspect of a DeFi protocol, and all are needed to get a complete picture.
Protocol Level
Protocol level data lets you evaluate how a protocol behaves and compare it against other protocols to determine which offers the best opportunities or best aligns with your investment goals.
Several types of protocols are designed to serve different financial functions, including trading, borrowing/lending, staking, insurance, and asset management. And there are multiple protocols within each space – for example, there are over 40 staking protocols!
Like corresponding traditional finance products, the different DeFi protocol types have different metrics to evaluate (e.g., staking yields for staking protocols and AUM for asset management protocols). As an example, if an analyst is looking to identify trends on lending protocols, like Aave, they would need aggregated metrics for lending, pools, and assets delivered in a time series.
Pool Level
Pool level data allows you to see what assets are in a protocol's liquidity pool, what wallets are participating in that pool, and how ownership is distributed among them.
This data can be used to compare liquidity pools against each other to identify those that offer the best best opportunities for investors and liquidity providers, as well as to monitor your share of a pool when you invest.
If a trader was looking to identify opportunity and risk in Aave liquidity pools for example, they'd need the list of assets available to borrow in pools including asset names, amount available, APY variable and APY stable.
Armed with live and historical time series data, they could backtest a trading strategy, programmatically trigger opening or closing a trade, or perform arbitrage.
Asset Level
Along with the pool-level view, you also need visibility at the asset level to fully understand opportunity and risk. When you provide liquidity, tracking the price of the assets inside and outside a pool is essential for understanding your potential impermanent loss, without which you cannot properly calculate your profit or loss.
Wallet Level
Since blockchains function as public ledgers, it is possible to see the transaction history of any given wallet. With wallet-level data, you can evaluate the positions of participants in a liquidity pool, how they have behaved in the past, and model how they may act in the future. With real-time data, you can also see transactions as they happen and react as appropriate if their movement is material to your position.
Besides looking at activity of other wallets, an Aave liquidity provider would need to understand every event where their wallet interacted with the protocol (e.g., borrows, repays, swaps, deposits, withdrawals, flash loans, claimed rewards, liquidations, etc.) for accounting and compliance purposes.
Why is This DeFi Data Needed?
In addition to providing the ability to evaluate a given protocol, pool, asset, or wallet, comprehensive DeFi data lets you identify and capitalize on arbitrage opportunities across multiple protocols, pools, and asset types.
A comprehensive view of the DeFi ecosystem opens the possibility of developing complex algorithmic trading strategies that generate significant returns. It is also needed for post-trade activities like accounting and regulatory and tax compliance.
How to Get DeFi Data
All DeFi data can be obtained from the blockchain, but raw blockchain data is difficult to work with and requires specialized expertise. While much of DeFi is currently built on the Ethereum blockchain, there are over 20 blockchains for staking alone.
Building the infrastructure and developing the knowledge needed to get this data is time-consuming and costly. To get the DeFi data needed for success, institutions shouldn't try to collect it themselves and are better served partnering with a data provider like Amberdata. Our platform connects to all the major blockchains, decentralized exchanges and centralized exchanges that matter today, allowing a comprehensive view of DeFi as well as crypto markets, NFTs, DAOs, and more.
Download our ebook, "The Decentralized Finance (DeFi) Primer", to learn more about DeFi and why institutions need a data partner like Amberdata to take advantage of this fast-growing segment of the digital asset space.
