Indices

In traditional stock markets, millions of dollars are invested into Index funds. The most popular category of index funds are ETFs, which are passively managed funds that fill their investment basket by tracking a particular index. This makes it easy for investors to have good spreading in their portfolio without putting too much effort and time into managing it. Crypto also has its indices, which are very similar to how ETFs work. Typically, crypto indices track currencies or tokens. Before we talk about crypto indices – For the sake of clarification – Let's first focus on what ETFs exactly are and how they work.

What are ETFs

Exchange Trades Funds (ETFs) allow investors to invest in a basket of securities such as stocks, bonds, commodities or a mix of these. This offers the investor diversification benefits. Investing in ETFs has become increasingly popular in recent decades.

ETFs are mutual funds that want to track the performance of a basket of securities. For example, if you buy an ETF that tracks all of the securities within an index, you can invest in all of the securities in that index by purchasing just one ETF.

An ETF is also referred to as a publicly traded fund because it is traded on a stock exchange just like stocks. The price of the ETF changes during the trading day as they can be traded in the market. This differs with mutual funds as they can only be traded once a day after the stock markets close.

Types of ETFs

There are different types of ETFs available on the market. Each ETF has a prospectus and a fact sheet that describes the characteristics of the ETF, such as composition, objectives and risk. These documents are available on the website of the ETF issuer.

Below are some examples of ETF types.

  • Index ETFs track a basket of stocks that are comparable to a particular index.
  • Bond ETFs can consist of a basket of government bonds, corporate bonds, and government and local bonds.
  • Sector ETFs track securities from a particular sector, such as technology, banking, or the oil and gas sector.
  • Commodities ETFs can consist of commodities such as oil or gold.
  • Currency ETFs invest in currencies such as the euro or the Canadian dollar.
  • Blockchain ETFs own stocks in companies that have business operations in blockchain technology or in some way profit from it. The blockchain ETFs are out of the scope of this article.

Tracking methods

The tracking methods the ETF uses to track the underlying securities may vary. The tracking method can be both physical and synthetic. Physical ETFs try to track their target composition by holding all, or at least a representative sample, of the underlying stocks that make up the index. For example, if you invest in an S&P 500 Index ETF, you own any of the 500 stocks represented in the S&P 500 Index, or a subset of them. Physical replication is fairly straightforward and transparent. Most ETF products are physical ETFs.

A synthetic ETF is designed to mimic the performance of an underlying composition using derivatives (eg S&P 500 futures) and swaps instead of physical stocks.

Indices in Crypto

Now, with the fundamentals out of the way, let’s see what kind of DeFi indices are out there.

PieDAO DEFI+L

DEFI+L is a tokenized representation of the biggest projects on the Ethereum blockchain. When an investor buys DEFI+L, the smart contract either purchases the underlying assets from Uniswap or other decentralized providers, or uses tokens available in the investor’s wallet, sending them to the treasury. In this way DEFI+L tokens are fully backed by reserves, redeemable at any time at the press of a button.

The DEFI+L index is built using Balancer smart pools which constantly rebalance and react to market changes in real-time.

It’s also possible to stake DEFI+L in the DEFI+L / ETH pool. Investors are able to provide liquidity in return for a steady stream of DOUGH. This pool enables an efficient market for other investors to easily swap in and out of the DEFI+L token.

At the time of writing, the underlying assets in which this index is investing is as followed:

  • YFI (Deposited in the Aave lending protocol)
  • Aave (HODL)
  • SUSHI (Staked at Sushiswap)
  • UNI (Deposited in the Compound lending protocol)
  • SNX (Deposited in the Aave lending protocol)
  • MKR (HODL)
  • COMP (Deposited in the Compound lending protocol)
  • LINK (Deposited in the Aave lending protocol)

PieDAO DEFI+S

DEFI+S is a tokenized representation of the most promising projects in the space. Like DEFI+L, when a user buys DEFI+S, the smart contract purchases the underlying. If the investor holds all the required tokens in his wallet, the tokens can be directly bought as well. In this way DEFI+S tokens are fully backed, and can be redeemed at any time at the press of a button.

This index is also built using Balancer smart pools. For both DEFI+L and +S indices, there is no withdrawal fee.

At the time of writing, the underlying assets in which this index is investing is as followed:

  • UMA (HODL)
  • REN (HODL)
  • LRC (HODL)
  • BAL (HODL)
  • PNT (HODL)
  • MLN (HODL)

DeFi Pulse Index

The DeFi Pulse Index (DPI) is another index that tracks the performance of DeFi assets on Ethereum.It was the first of its kind by deploying an index of decentralized finance that isn’t synthetic or a derivative and lets the investor own the tokens that comprise the capitalization weighted index. Like DEFI+L and +S, DeFi Pulse Index tokens are directly redeemable for its DeFi tokens.

DPI is built on Set Protocol’s new v2 infrastructure and is automatically rebalanced. Still, the DeFi Pulse team manually curates the index as well.

Currently, DPI invests in the following assets:

  • UNI
  • Aave
  • MKR
  • SNX
  • COMP
  • YFI
  • SUSHI
  • REN
  • LRC
  • BAL
  • KNC
  • FARM
  • CREAM
  • MTA

sDEFI

sDEFI is an index token developed by the community of Synthetix. Synthetix is one of the leading on-chain synthetic assets and derivatives trading platforms on Ethereum. sDEFI can only be purchased on the Synthetix Exchange with Synthetix’s native stablecoin, sUSD. As such, sDEFI is not only an attractive financial instrument covering the performance of the DeFi market, it’s also a unique value proposition of the Synthetix project in general. It is import to note that sDEFI is comparable to a synthetic ETF: it is designed to mimic the performance of underlying composition by using derivatives. In sDEFI’s case, Chainlink price oracles are used to track the prices of the selected tokens.

As of writing, the sDEFI index includes the following tokens:

  • Aave
  • SNX
  • YFI
  • UNI
  • COMP
  • MKR
  • BAL
  • CRV
  • KNC
  • REN
  • UMA
  • WNXM

Conclusion

With so many high potential DeFi projects launching on the Ethereum platform, it can be very difficult for investors to separate the wheat from the chaff. Luckily for them, DeFi indices can help investors with setting up healthy portfolios with little to no maintenance from the investor’s side.