DeFi Index: Decentralized ETF

In the context of the explosive growth of DeFi tokens and structured financial products, decentralized Index funds (or DeFi Index) have become a simple way to gain passive and diversified market exposure.

DeFi Index is similar to traditional ETF

In traditional finance, the most similar to decentralized Index funds are exchange-traded funds (ETFs), which track the performance of Index, industries, commodities, or specific assets.

ETFs can be passive or active. For example, the Vanguard S&P 500 ETF is a passive stock basket of 500 large companies that are publicly traded in the US market. On the other hand, active ETFs usually have a team to determine the relevant portfolio allocation. This type of ETF has received constant attention because it outperforms passive ETFs. Passive ETFs were first launched by companies such as ARK Invest.

The difference between ETF and DeFi Index

Although there are many similarities between ETF and DeFi Index, there are also some fundamental differences.

Setup cost

The launch of ETFs is a costly business and faces huge regulatory obstacles. DeFi Indexes can be established relatively quickly because they are built on technologies that do not require permission and use smart contracts to manage investment portfolios.

For example, after a community member put forward this idea, indexed.finance’s Degen Index was released in only 4 weeks. This highlights how DeFi greatly reduces the barriers to creating and participating in new financial products.

manage

Regardless of whether the DeFi Index follows an active strategy or a passive strategy, the portfolio is a largely automated process. For example, a simple smart contract might exchange Index’s basic stablecoin for a stablecoin with a higher interest rate. A more complex Index can run on a heavy-base smart contract, in which the supply of Index is a function of its price.

Dividend yield

Most of the DeFi Index is managed by the DAO, which uses liquidity mining as an incentive to increase market liquidity and as a way to distribute governance tokens. When a user holds Index tokens, you are eligible for further rewards.

What to look for in the DeFi Index?

An easy way to compare DeFi Index is to look at price performance and market value. Users can do this by switching between columns on the Index page of Zerion:

It is also important to understand the structure and management of DeFi Index (ie Index method). Differences in weights, rebalancing methods, and other factors may mean that two indexes with the same base token produce different returns.

  • Construction: Which tokens are eligible to be included in Index and why?
  • Weight: How do the tokens in Index weight each other?
  • Rebalancing: How and when to add and remove tokens from Index?
  • Portfolio structure: Which contract is used to operate Index?

Not all Indexes represent a basket of underlying assets held in smart contracts. For example, synthetic Index does not actually hold any base tokens, but uses price information to track their value, such as Synthetix’s sDeFi.

Liquidity Pool Index not only provides diversified exposure to a basket of assets, but also provides the ability to earn transaction fees. On the downside, Index holders may also face impermanence losses. For example, PowerPool Index is built for the Balancer pool, while Indexed Finance uses a similar model derived from Balancer.

Finally, investors should also consider fees and investment opportunities (liquid mining), as this will affect net returns. Below we will break down three popular DeFi Indexes: DeFi Pulse Index, Metaverse Index and Bankless BED Index.

DeFi Pulse Index

  • Symbol: DPI
  • Creator: Index Coop
  • Build: The 12 most popular DeFi tokens on the Ethereum blockchain
  • Weight: Market value weighted
  • Rebalance: once a month, managed by the community
  • Portfolio structure: ERC20 contract holds a basket of basic tokens on Set Protocol
  • Cost: 0.95% annualized streaming media fee paid to Index Coop
  • Liquidity mining: Yes, eligible for Index governance rewards
  • Advantages: For anyone who is optimistic about DeFi, it is a simple passive strategy with no impermanence loss
  • Disadvantages: highly correlated with the price of Ethereum, and may not be an effective form of portfolio diversification

Metaverse Index

“The Metaverse Index aims to capture the trend of entertainment, sports, and business turning to virtual environments, where economic activities are carried out on the Ethereum blockchain.”

  • Symbol: MVI
  • Creator: Index Coop
  • Structure: The most popular DeFi token, NFT, entertainment, virtual reality, augmented reality or music belonging to the Coingecko category.
  • Weighting: market capitalization and liquidity weighting
  • Rebalance: once a month, managed by the community
  • Portfolio structure: ERC20 contract holds a basket of basic tokens on Set Protocol
  • Cost: 0.95% annualized streaming media fee paid to Index Coop
  • Liquidity mining: Yes, eligible for Index governance rewards
  • Advantages: For people like Axie , Rarible and Audius who are optimistic about NFT and entertainment protocols, this is a simple passive strategy

Bankless BED Index

This beginner-oriented “portfolio solution” was created by Bankless DAO and Index Coop, and it perfectly shows what the subject Index looks like.

  • Symbol: BED
  • Creator: Index Coop and Bankless DAO
  • Construction: Each constituent token in the BED represents an aspect of the future of finance: value storage token (Wrapped Bitcoin ), programmable currency (Wrapped Ethereum ) and decentralized finance (DeFi Pulse Index)
  • Weight: equal weight (33.33%)
  • Rebalance: monthly
  • Portfolio structure: ERC20 contract holds a basket of basic tokens on Set Protocol
  • Cost: 0.25% of the annualized streaming cost is split equally between Index Coop and Bankless DAO
  • Liquidity mining: no
  • Advantages: a simple passive strategy for beginners

To sum up, DeFi Index has several advantages:

  • No need for technical analysis as an investor
  • Save gas costs for purchase and rebalancing
  • Additional rewards when Index is pledged

But in addition to providing simple investment opportunities for beginners and those interested in specific investment topics, the DeFi Index also illustrates the possibilities when finance is truly composable.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/defi-index-decentralized-etf/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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