Week In Review
Notable Messari Updates
The Sushiswap team announced that the native token launchpad, called MISO (Minimal Initial SushiSwap Offering) will be launched on May 20, 2021
The Zilliqa team shared that they completed the mainnet recovery, and the network has started to process transactions similar to before.
Voting on a proposal to determine how Rari Capital should reimburse users who lost their ETH during the last exploit has started and will end on May 22, 2021.
Polkadot chain faced some issues with block production early in the week.
Kyber DMM protocol will now get added as a new liquidity protocol on Kyber’s liquidity hub, with a portion of fees going to the KyberDAO and 42M KNC (~20% of the total KNC supply) will be minted and managed by KyberDAO as part of a 12-month Kyber Ecosystem Growth Fund.
A subset of Polygon validators experienced sync inconsistencies on Heimdall (Polygon’s PoS chain consensus layer) on May 26, 2021, which also cause problems on Bor (the chains block production layer).
Sector Performance Overview
The week ending on May 27th saw a quick reversal to last week’s market crash. While most assets remain well below their ATH, the market found some footing on Monday 24th possibly marking the end of the market decline. Following Messari’s sector convention, three out of the five sectors covered in this report had negative 7-day returns but nothing as extreme compared to last week’s performance. On the positive side, Web3 and DEXs were the two sectors with positive performance for the week. On the contrary, Currencies and DeFi were the underperforming sectors of the week with a negative return of -3.5% and -3.9%.

Sector Portfolio Methodology
This week’s report revolves around comparing the performance, risk, and correlation structure between different sectors. In order to achieve this, we selected the top assets (ranked by market capitalization) from each of the sectors covered in this report and constructed a market-weighted portfolio that acts as a proxy for the overall sector. The sector portfolio allocations are the following using market capitalization data as of May 27th.

The following analytics are derived using this set of portfolios in order to get an estimated comparison of their relative performance with each other.
Sector Portfolio Deep Dive
Performance across the market continued to deteriorate well into the March 20th to March 27th week. Starting March 20th, all sectors rebounded experiencing a sudden bounce in prices with some reaching a 15-25% performance in one single day. However, the pump was short-lived across all sectors as the market continued to decline in the coming days. Starting on Monday 24th, the market found some relief as asset prices began to turn around signaling the potential end to the sudden market crashed triggered last week.

Sector portfolios moved in tandem over the past 7-days following a nicely laid out V-shaped pattern. Cumulative performance starting on May 20th across sectors sunk as much as 30% by mid-week but quickly bounced back capturing back some of the early gains of the week. Although sector performance was relatively tight across all portfolios during most of the week, by the end of the week Web3 and DEXs began to outpace the rest of the groups. Both portfolios finished the week with a 28% return followed by the smart contract platform portfolio which ended the week with a 23% return. The currencies portfolio underperforming the rest posting a weekly return of 8%.

From a volatility perspective, defined as the standard deviation of daily returns, all sector portfolios saw a similar spike starting in mid-May as the market began its drastic decline. Before the crash, volatility across sectors ranged from 3-6%. After the crash, sector volatility is ranging from a low of 6% to a high of 12%. The DEX portfolio, composed primarily of Uniswap, PancakeSwap, and THORChain, experience the highest increase in volatility moving from 6% to an all-time high of 12.5% over the past two weeks. The top asset and currency portfolios are the least volatile primarily due to their higher allocation to Bitcoin and Ethereum.

As of consequence of the market crash, all asset correlations reached new all-time highs. The animation below highlights this tendency towards higher correlation over the past four weeks. The correlation matrices shown below are computed on a weekly basis using a 30-day lookback to accurately depict the evolution of the correlation structure between the sector portfolios. As seen below, correlations between sectors are well above 80% with certain pairs reaching levels as high as 95%. One caveat worth highlight is that some sector portfolios share the same underlying assets which directly results in higher correlation coefficients between some pairs.

The correlation between the sector portfolios and Bitcoin has been increasing since the beginning of May. The trend accelerated in mid-May as the market went belly up. The acceleration is most noticeable in the DeFi and DEX portfolios which saw a jump of roughly 20% in the past two weeks and approximately 40% since the beginning of the month. The Web3 and smart contract platform portfolio have seen a more gradual increase in their correlation coefficients going from 70% at the beginning of May to 85-87% by the end of the month. Unsurprisingly, the top assets and currency portfolios have a correlation greater than 95% as a result of Bitcoin’s dominance in the portfolios. As of May 27th, the correlation coefficient across all sector portfolios is greater than 80%.

The correlation between Ethereum and all sector portfolios is also well above 80%. Aside from the portfolios that have a hefty allocation to Ethreuem (smart contract platforms and top assets), the DeFi and DEX portfolios are the ones with the highest correlation coefficients standing at 91% and 89% as of yesterday. This is roughly 10% higher when compared to the correlation of both portfolios with Bitcoin potentially signaling that DeFi assets are beginning to decouple from Bitcoin. As of yesterday, the correlation coefficient of all sector portfolios is greater than 85%.