DeFi is a promising and rapidly developing segment of the cryptocurrency market. If at the beginning of the year its TVL was $ 21.55 billion, then by the end of November the figure reached $ 253.5 billion.
The total capitalization of cryptocurrencies exceeds $ 2.5 trillion. The DeFi sector is still relatively small – less than the rest of the market by about 10 times. However, the growth potential is significant. Almost every day there are new applications, and TVL is growing literally before our eyes.
The growth prospects of the sector attract investors, including players in the traditional market. However, to understand the whole variety of protocols is not so easy, especially for beginners. Investing heavily in one or two relatively simple projects is fraught with risks of losing funds.
And this is where DeFi indices come to the rescue. They allow you to kill two birds with one stone – to get rid of the need for fundamental analysis of many projects and diversify investments without bothering with portfolio rebalancing.
Key
- Against the background of the growth and development of the DeFi segment, decentralized indices are gaining popularity. These include tokens of the GameFi and NFT sectors, blue chips of the cryptocurrency market and assets with significant growth potential.
- New tools allow investors to purchase diversified portfolios from different sets of assets in a few clicks, without resorting to fundamental analysis and periodic rebalancing.
- The segment of DeFi-indices is still small, but the potential for its growth is significant.
What are DeFi indexes and what are they for?
Decentralized indices are similar to exchange-traded funds (ETFs). However, they are not yet regulated by organizations like the SEC and are not classified as securities.
The total amount of funds managed by traditional ETFs in 2021 reached $ 10 trillion. The capitalization of the global stock market exceeds $ 120 trillion.
As of 11/26/2021, the total market capitalization of the DeFi Indices sector is only $428 million. Given the current scale of the crypto market, the dynamics and growth potential of the segment, we can safely assume that $ 1 trillion of capitalization for the segment of decentralized indices is only a matter of time.
DeFi protocols specializing in indexes can be compared to asset managers like ProShares or Vanguard. Index tokens represent the investor’s share in the portfolio of a decentralized fund.
The largest share falls on the UNI token of the Uniswap exchange.
The annual fee for managing the index is 0.95%. The founder of The Daily Gwei, Anthony Sassano, is convinced that this is not so expensive, given the positive dynamics of the DPI.
However, as of the end of November, the growth rate of Ethereum and the DeFi sector as a whole exceeds the DPI indicator on various timeframes.
To include assets in the DPI, they must meet the following criteria:
- the token is available in the Ethereum blockchain;
- token from the field of decentralized finance and
- a token in the DeFi Pulse listing;
- the token is not classified as a security;
- emission is projected on the horizon of the next five years;
- in free circulation at least 5% of the issue of coins.
The index does not include derivative assets such as wrapped coins (WBTC, WETH), tokenized derivatives and synthetic financial instruments. Also excluded assets-requirements for other tokens.
The Metaverse Index (MVI) is a token-based index of the growing GameFi sector.
The screenshot below shows the assets included in the index.
When calculating the shares of MVI components, not only capitalization is taken into account, but also liquidity indicators. The main requirements for inclusion in the index:
- availability in the Ethereum blockchain;
- market capitalization of more than $50 million;
- “acceptable and stable” liquidity on Ethereum exchanges.
The dynamics of the MVI value shows an upward trend, significantly ahead of the indicators of ETH, BTC and the DeFi sector as a whole.
The market capitalization of the Metaverse Index is $ 66.8 million (CoinGecko data as of 26.11.2021). You can purchase MVI both in the Index Coop appand on Uniswap.
Another interesting tool is the ETH 2x Flexible Leverage Index (ETH2X-FLI). As noted by the developer Peter Le’Monade, it allows you to use leverage to open “super long” positions on the second cryptocurrency in terms of capitalization.
According to him, earlier users performed a number of operations for this. For example:
If the risk appetite is very high and the price of ether continues to rise, some users have repeated the above algorithm. This approach allows you to purchase a much larger amount of asset than, for example, in the spot market. However, this strategy is associated with increased risks and considerable transaction fees.
The developer stressed that ETH2x-FLI allows you to achieve approximately the same effect “in one transaction, since a position with leverage is simply tokenized and traded like any other token of the ERC-20 standard.”
“A lot of people associate leverage with casinos like BitMEX, where there are margin positions with a leverage of 25x. We think of it as the exact opposite,” said Peter Le’Monade.
ETH2x-FLI is based on the cETH token of the Compound service and the USDC stablecoin. From the name/ticker itself, it is clear that the index implies a leverage of 2x.
The popularity of the tool is evidenced by CoinGecko data:ETH2X-FLI competes with DPI for the first place in the market capitalization rating of its segment.
Bitcoin Flexible Leverage Index (BTC 2x Flexible) is similar to the previous instrument. The only difference is that it is based on Bitcoin, not Ethereum.
Bankless BED Index (BED) is an easy-to-understand and at the same time the most diversified tool from Index Coop.
It consists of three parts:
- 33.3% — bitcoin;
- 33,3% — Ethereum;
- 33.3% – DPI index.
Thus, bed covers most of the most capitalized assets, cutting off low-liquid coins. The index is rebalanced monthly to support the above proportions.
The Data Economy Index (DATA) covers the largest projects that are somehow related to data in the digital economy. The index is based on the following tokens:
- Chainlink;
- Filecoin;
- The Graph;
- Basic Attention Token;
- Livepeer;
- Ocean Protocol;
- Numeraire.
To be included in the index, the capitalization of the coin must exceed $ 100 million.
Indexed Finance (NDX)
This is another protocolfocused on portfolio management. Indexed Finance has a native token – NDX. An automatic market maker (AMM) mechanism has been implemented, like Balancer, which rebalances indexes.
At the time of writing, there are six indices on the platform:
- DEGEN – “promising Ethereum protocols with significant growth potential”, including REN, 1INCH, ALPHA, OCEAN and others;
- NFTP – protocols focused on NFT and metaverse (AXS, ENJ, MANA, SAND and others);
- DEFI5 – highly capitalized DeFi assets, including SUSHI, UNI, AAVE, CRV, COMP, MKR and SNX;
- ORCL5 – blockchain projects related to oracles (LINK, BAND and others);
- FFF – an index that includes wrapped Bitcoin and Ethereum, as well as DEGEN, DEFI5 and CC10;
- CC10 – Medium and large cap DeFi projects (OMG, UMA, YFI, BAT, UNI and others).
PowerPool
Indexes from PowerPool are smart pools based on Balancer’s AMM. The project provides a CVP management token. With its help, users vote for platform upgrades, new indices, portfolio strategies, etc.
PowerPool offers the following products:
- YLA is a tool based on an “optimized basket of the most profitable yEarn storages of stablecoins;
- BSCDEFI — an index based on the “blue chips” of the Binance Smart Chain ecosystem;
- xCVP is a rewards distribution solution from the PowerPool DAO Treasury;
- ASSY — an index based on highly capitalized DeFi tokens (AAVE, SNX, COMP, MKR, YFI, UNI) and the native asset CVP;
- YETI is the instrument where YFI and SUSHI account for the largest shares (also includes CREAM, AKRO, PICKLE, KP3R and CVP).
PieDAO
Indices from the PieDAO platform – the so-called Pies – are similar to the tools from Index Coop.
Pies uses a Balancer-based automatic rebalancing mechanism. There is also a management token – DOUGH,whose holders can block it for staking for a period of 6 to 36 months. Owners of the asset can vote for new Pies and other issues of platform development.
The following products are available on the PieDAO platform:
- PLAY — index based on metaverse tokens;
- DEFI+L — “blue chips” of DeFi like LINK, MKR, AAVE, UNI;
- YPIE — a tool based on the yEarn Finance and SushiSwap ecosystems;
- USD++ — an index based on the stablecoins USDC, TUSD, DAI and sUSD;
- BCP (Balanced Crypto Pie) – a combination of WBTC, WETH and DEFI++;
- DEFI++ is an index consisting of DEFI+L and DEFI+S;
- DEFI+S is a product based on DeFi assets of relatively low capitalization (UMA, REN, LRC, BAL, PNT and MLN);
- BTC++ is an index based on tokenized bitcoins (imBTC, WBTC, pBTC, sBTC).
Advantages and disadvantages of DeFi-indexes
DeFi indices provide ample opportunities for investment diversification. At the same time, you do not need to delve into the technical and monetary features of various projects – it is enough to purchase a token on the DEX.
The dynamics of indices based on the NFT, GameFi and metaverse sectors is significantly ahead of the market indicators. Consequently, investments in such products can contribute to the growth of the portfolio.
However, do not forget about the risks, including possible hacker attacks. No project is immune from them, even despite the audit.
Many projects offer liquidity mining programs. However, such interventions usually have only a short-term effect. After the completion of programs, liquidity often evaporates, and the native token drops sharply in price.
Systemic risks arealso inherent in “financial LEGO”, as many protocols are built on top of others. This means that the failure of any project will entail irreparable losses for token holders.
DeFi indices are not perfect. Even the DPI, despite the conservative approach to the selection of assets, is inferior in profitability to Ethereum and the DeFi sector as a whole. Consequently, an experienced investor is able to create a better portfolio on his own. However, this requires an in-depth analysis of many projects, thoughtful asset management, careful timing of the purchase of coins and simply luck.
Findings
When choosing indices, the investor should pay attention not only to their composition and historical price dynamics, but also to commissions, as well as management strategies. In addition, it is important to take into account the risk appetite – it is individual for each of the market participants.
The decentralized index segment is still in the earliest stages of development. However, given its small size, we can expect the emergence of new products and the growth of their capitalization in the medium and long term.
