The Indexes Unlocking More Efficient DeFi Exposure

Quantstamp Labs
September 7, 2021

In the traditional finance world, index funds offer a relatively low-risk way for investors looking for stable, long-term returns. Because they track multiple assets, they are inherently diversified; and while investors may not experience the massive gains of a non-index investment that performs well, they are also protected from huge losses. 

Indexes are considered an essential component of any advanced market. They offer a straightforward way to gain exposure to an entire sector by investing in a single—and highly liquid—asset. Given this, one of their strongest value propositions is efficiency. 

In DeFi, index funds are not only efficient, but affordable and permissionless as well. By investing in only one fund, DeFi users can save on gas fees where they would have otherwise had to purchase multiple tokens. On a decentralized network, users can buy and sell their holdings at any time, unlike assets within the traditional finance world. 

Like with other index funds, the main advantage is simplicity: investors don't need to know the intricacies of different protocols, the economics of each token, or historical performance in order to intelligently invest. For those looking for a low-maintenance way to gain exposure, it's a great way to do so while also minimizing risk.

Crypto index funds are not new. In 2017, Invictus Capital launched one of the first tokenized crypto-only index funds, using seed funding to buy the underlying assets. The Bitwise 10 Crypto Investment Fund (BITW), composed of the 10 most highly valued cryptocurrencies, offers a way for US investors to gain crypto exposure through traditional brokerage accounts.

However, centralized index funds come with counterparty risk—the possibility that the other party may not fulfill its contractual obligations. While it doesn’t completely eliminate the issue, decentralized indexes help reduce this risk; operations are automated and executed by smart contracts rather than a fund manager. And, where governance is decentralized, token holders help set key parameters and have a role in determining the fund’s future direction.

As the decentralized index sector heats up, here are some of the projects leading the way:



TCAP by Cryptex

Cryptex is focused on building open-source financial solutions for the global crypto community. Using Ethereum’s smart contract system, Cryptex is creating decentralized financial solutions including the Total Crypt Market Cap Token (TCAP). TCAP is a crypto asset that tracks the value of the entire crypto market by total market capitalization—an index of over 9000 assets. TCAP is managed as a Decentralized Autonomous Organization (DAO) and governed by CTX, an ERC20 governance token. Users can mint, trade, become a liquidity provider, or stake assets to earn CTX rewards. Holders of CTX can make governance proposals, vote on current and future protocol upgrades, or delegate their votes to other holders. 

Through the protocol, the Cryptex team aims to provide a decentralized solution for investors to get real-time price exposure to the entire crypto market.

Quantstamp recently audited smart contracts for Cryptex (view the report). 


Set Protocol

Set is a non-custodial protocol for handling baskets of tokens on the Ethereum network. With Set, anyone can create their own index of tokens. A “set” is an ERC20 token that represents multiple tokens, where users mint their custom token by depositing component tokens, and “unbundle” to get the tokens back. These custom “sets” can be listed on exchanges and are fully collateralized and smart contract-ready. They can even be bundled together to create sets of sets. The protocol is also open, permissionless, and trustless. 

Set aims to facilitate a more open financial system by making investing more simple and accessible.




DPI by Index Coop

The Index Cooperative is a DAO focused on building and governing a variety of crypto index products. With products built on Set Protocol’s infrastructure, they are governed and maintained by INDEX token holders. The DeFi Pulse Index (DPI) is one such product: a digital asset index designed to track DeFi token performance. As a capitalization-weighted index, DPI includes popular Ethereum-based DeFi tokens, included based on specific criteria. Token holders can directly redeem the index’s underlying tokens. 

While DPI is arguably their first and most well-known product, they have since launched other indexes. For example, the Metaverse Index is composed of tokens from the NFT, entertainment, virtual reality, augmented reality, and music arenas. 



sDEFI

sDEFI is a synthetic index of popular DeFi tokens selected by the Synthetix community, including tokens such as COMP, MKR, SNX, BAL, and many other DeFi focused tokens. Investors need to purchase sUSD via any one of the major DEX’s or aggregators (Uniswap, SushiSwap, Paraswap, or 1Inch Exchange), then obtain sDEFI via the decentralized Kwenta Exchange. Because sDEFI is managed by the community, the tokens being tracked, as well as their weightings, may change down the road. In fact, earlier this year, the Synthetix community decided to rebalance the index to add new tokens including $BOND and $RUNE. sDEFI is on its 5th iteration and the community is already working on V6 that will not only adjust the weightings but include a couple of new DeFi tokens.


What’s Next?

There has been increasing demand from financial advisors, hedge funds, institutions, and other professional investors for exposure to DeFi, and index funds offer the perfect opportunity to meet this need. They offer a powerful way to create a diversified portfolio simply by investing in a single asset. Given this, it’s not surprising that as DeFi grows, so does the demand for indexes.

Bitwise Asset Management, the world’s largest crypto index fund manager, launched the world’s first Uniswap and AAVE funds in August, enabling accredited investors to gain efficient exposure to each protocol. With over $1 billion AUM, this bodes well for future demand. Galaxy Digital recently announced the launch of the Galaxy DeFi Index Fund, which aims to provide institutional investors access to returns based on DeFi performance. TCAP also recently became available through Gemini, a development that offers exposure and custody to institutional investors. It’s also likely that the space will experience more growth as indexes expand their secondary market potential through avenues like futures and options.

These index funds are undoubtedly helping a more mainstream audience gain exposure to DeFi’s incredible growth. Meanwhile, decentralized, community-governed indexes are also becoming more common, which is unsurprising considering the values that underpin the DeFi space. But one thing is certain: decentralized index funds are here to stay. And, as they’ve remained a key part of traditional finance, it is likely they will hold similar importance within DeFi, especially as the sector continues to evolve.


퀀트스탬프 랩스
September 7, 2021

In the traditional finance world, index funds offer a relatively low-risk way for investors looking for stable, long-term returns. Because they track multiple assets, they are inherently diversified; and while investors may not experience the massive gains of a non-index investment that performs well, they are also protected from huge losses. 

Indexes are considered an essential component of any advanced market. They offer a straightforward way to gain exposure to an entire sector by investing in a single—and highly liquid—asset. Given this, one of their strongest value propositions is efficiency. 

In DeFi, index funds are not only efficient, but affordable and permissionless as well. By investing in only one fund, DeFi users can save on gas fees where they would have otherwise had to purchase multiple tokens. On a decentralized network, users can buy and sell their holdings at any time, unlike assets within the traditional finance world. 

Like with other index funds, the main advantage is simplicity: investors don't need to know the intricacies of different protocols, the economics of each token, or historical performance in order to intelligently invest. For those looking for a low-maintenance way to gain exposure, it's a great way to do so while also minimizing risk.

Crypto index funds are not new. In 2017, Invictus Capital launched one of the first tokenized crypto-only index funds, using seed funding to buy the underlying assets. The Bitwise 10 Crypto Investment Fund (BITW), composed of the 10 most highly valued cryptocurrencies, offers a way for US investors to gain crypto exposure through traditional brokerage accounts.

However, centralized index funds come with counterparty risk—the possibility that the other party may not fulfill its contractual obligations. While it doesn’t completely eliminate the issue, decentralized indexes help reduce this risk; operations are automated and executed by smart contracts rather than a fund manager. And, where governance is decentralized, token holders help set key parameters and have a role in determining the fund’s future direction.

As the decentralized index sector heats up, here are some of the projects leading the way:



TCAP by Cryptex

Cryptex is focused on building open-source financial solutions for the global crypto community. Using Ethereum’s smart contract system, Cryptex is creating decentralized financial solutions including the Total Crypt Market Cap Token (TCAP). TCAP is a crypto asset that tracks the value of the entire crypto market by total market capitalization—an index of over 9000 assets. TCAP is managed as a Decentralized Autonomous Organization (DAO) and governed by CTX, an ERC20 governance token. Users can mint, trade, become a liquidity provider, or stake assets to earn CTX rewards. Holders of CTX can make governance proposals, vote on current and future protocol upgrades, or delegate their votes to other holders. 

Through the protocol, the Cryptex team aims to provide a decentralized solution for investors to get real-time price exposure to the entire crypto market.

Quantstamp recently audited smart contracts for Cryptex (view the report). 


Set Protocol

Set is a non-custodial protocol for handling baskets of tokens on the Ethereum network. With Set, anyone can create their own index of tokens. A “set” is an ERC20 token that represents multiple tokens, where users mint their custom token by depositing component tokens, and “unbundle” to get the tokens back. These custom “sets” can be listed on exchanges and are fully collateralized and smart contract-ready. They can even be bundled together to create sets of sets. The protocol is also open, permissionless, and trustless. 

Set aims to facilitate a more open financial system by making investing more simple and accessible.




DPI by Index Coop

The Index Cooperative is a DAO focused on building and governing a variety of crypto index products. With products built on Set Protocol’s infrastructure, they are governed and maintained by INDEX token holders. The DeFi Pulse Index (DPI) is one such product: a digital asset index designed to track DeFi token performance. As a capitalization-weighted index, DPI includes popular Ethereum-based DeFi tokens, included based on specific criteria. Token holders can directly redeem the index’s underlying tokens. 

While DPI is arguably their first and most well-known product, they have since launched other indexes. For example, the Metaverse Index is composed of tokens from the NFT, entertainment, virtual reality, augmented reality, and music arenas. 



sDEFI

sDEFI is a synthetic index of popular DeFi tokens selected by the Synthetix community, including tokens such as COMP, MKR, SNX, BAL, and many other DeFi focused tokens. Investors need to purchase sUSD via any one of the major DEX’s or aggregators (Uniswap, SushiSwap, Paraswap, or 1Inch Exchange), then obtain sDEFI via the decentralized Kwenta Exchange. Because sDEFI is managed by the community, the tokens being tracked, as well as their weightings, may change down the road. In fact, earlier this year, the Synthetix community decided to rebalance the index to add new tokens including $BOND and $RUNE. sDEFI is on its 5th iteration and the community is already working on V6 that will not only adjust the weightings but include a couple of new DeFi tokens.


다음 단계는 무엇입니까?

There has been increasing demand from financial advisors, hedge funds, institutions, and other professional investors for exposure to DeFi, and index funds offer the perfect opportunity to meet this need. They offer a powerful way to create a diversified portfolio simply by investing in a single asset. Given this, it’s not surprising that as DeFi grows, so does the demand for indexes.

Bitwise Asset Management, the world’s largest crypto index fund manager, launched the world’s first Uniswap and AAVE funds in August, enabling accredited investors to gain efficient exposure to each protocol. With over $1 billion AUM, this bodes well for future demand. Galaxy Digital recently announced the launch of the Galaxy DeFi Index Fund, which aims to provide institutional investors access to returns based on DeFi performance. TCAP also recently became available through Gemini, a development that offers exposure and custody to institutional investors. It’s also likely that the space will experience more growth as indexes expand their secondary market potential through avenues like futures and options.

These index funds are undoubtedly helping a more mainstream audience gain exposure to DeFi’s incredible growth. Meanwhile, decentralized, community-governed indexes are also becoming more common, which is unsurprising considering the values that underpin the DeFi space. But one thing is certain: decentralized index funds are here to stay. And, as they’ve remained a key part of traditional finance, it is likely they will hold similar importance within DeFi, especially as the sector continues to evolve.


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