Index investing in the stock market has become very popular due to the rapid spread of exchange traded funds or ETFs, which often follow popular market indices such as the S&P 500 or Nasdaq-100.
Investing in the entire market can be a simple but effective strategy. Instead of wasting energy and time trying to win – often without success – investors are guaranteed an average return that has been more than decent for both stocks and cryptocurrencies over the past ten years.
The emergence of decentralized financing in the summer of 2020 seems to have revived the concept of passive investment in cryptocurrencies. In addition to creating a new well-defined class of crypto assets, he has strengthened the infrastructure needed to create something similar to the original crypto ETF.
Several projects and platforms have launched their DeFi indices in 2020. Some of these, such as Synthetix’s FTX DeFi permanent contract or sDEFI, are derivatives based on synthetic contracts. They only track the price of a basket of assets without having the necessary tokens.
But DeFi offers the opportunity to create something more ETF-like. These types of funds always have a basic basket of assets that they need to follow. At the end of each trading day, some large institutions are allowed to create or repurchase ETF shares based on net worth. They create new shares and sell them if the ETF is more expensive than the assets they own, and buy back existing shares if they are lower.
The DeFi-based index allows exactly the same type of arbitration mechanism, but does not have to be limited to a specific group of moderators.
There are currently three major DeFi products such as ETFs: the DeFi Pulse Index, two different PieDAO indices and the PowerPool Index.
Indices vary primarily based on the origin they are made of and how each character is weighted. DeFi Pulse and PieDAO use emphasis on market value, while PowerPool has a fixed share of each token. The PieDAO and PowerPool indicators can be changed by voting Governance with Dough and CVP, respectively.
While DeFi Pulse and PieDAO are very similar to the characteristics of traditional ETFs, the creation of the PowerPool Index shows that DeFi indices can eventually grow beyond the potential offered by the stock markets.
The index allows holders to vote on proposals for handling large protocols without deviating from the index. This is part of the team’s vision for smart indicators that support the tool offered by direct ownership of the underlying tokens. Although this is probably dictated by the project’s strong focus on descriptive management, it indicates that the possibilities offered by the formation of DeFi have not yet been fully explored.
DeFi Pulse is currently the most popular index with a market value of $ 36 million. The total value of the PieDAO indicators is estimated at $ 3.7 million, while the strength index crossed the current high of $ 500,000.
Although these indicators are still young, they were relatively recent and are likely to be in the early stages of the growth cycle. However, some experts see severe limitations on maximum size.
Crypto product for crypto enthusiasts
Meltem Demirors, Strategy Director at CoinShares, believes that the use of the term “ETF” for redeemable index funds is not entirely correct, as the concept of ETFs is specific to traditional markets. She told the Cointelegraph:
“ETFs are an investment product that combines the benefits of diversification and easy trading with a single stock within a single index. Like many other financial products, they rely on a leader, a responsible person and multiple brokers, and they have administrative cost fees, trading restrictions, how easy it is to buy or sell them, and varying degrees of quality. ”