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Why Do We Need DeFi Index, and Which Solution to Choose

Decentralized Finance (DeFi) took the crypto market by storm in 2020. The number of DeFi and related projects has grown exponentially, and so did the gains. As the adoption and traction grow, the DeFi market is gradually moving towards its maturity. And this means adopting more and more features, practices, and instruments of traditional finance.

One of the obvious next steps in this direction is ETFs and index funds (or, given the decentralized nature of DeFi, rather index protocols).

Why Do We Need DeFi Index, and Which Solution to Choose, cryptoindex, DeHive

Why indexes?

Most retail (and a lot of institutional investors, too) are willing to avoid the hassle of day-to-day tracking the performance of individual assets. Yet, they want to at least keep up with the market (or even better — outperform it) and not to miss out on its huge mid to long-term potential.

And this is exactly when ETFs or index funds are coming into play.

A traditional index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). However, traditional indexes are still very different from the DeFi ones.

Decentralized indexes extend the functionality of newly emerged decentralized finance, fuelling adoption by facilitating the ease of use and overall crypto market effectiveness. Not to mention that the crypto market should for sure have crypto-native ETFs as well.

They also could help investors to make more money, since historically, index funds and ETFs have better returns than actively managed mutual funds, especially in the long-term. And definitely, they outperform almost any personal investment strategy into individual assets.

In the case of Ethereum-based DeFi (which is almost all DeFi as of today), purchasing a decentralized index is also a way to save on gas fees — the problem that became a huge issue during the recent DeFi boom, preventing a lot of smaller investors from active participation in the ongoing yield party.

Unlike centralized indexes that are typically managed manually, their decentralized analogs typically utilize automation (often employing Automatic Market Makers — AMMs). Also, they store a basket of underlying assets in a smart contract, which reduces counterparty risk in comparison with the centralized ones.

Overall, the decentralized indexes bring several major benefits inherited from their traditional ancestors:

  • Portfolio diversification
  • Low risk, greater stability
  • Low fees and taxes
  • Better long-term returns
  • Automatic asset selection
  • Perfect for passive investors

Thus, the burning question for the potential investor is which decentralized index protocol to choose. So, let’s dive deeper into this one.

PowerPool’s indexes

At the end of 2020, PowerPool, which is run by an anonymous team, launched its platform for decentralized DeFi smart ETFs. Its users can deposit the required tokens into the pool and mint the index tokens that are based on tuned Balancer AMM’s fork.

Apart from getting rewards by collecting the index’s governance token — CVP, the platform uses the respective governance tokens of underlying assets for lending, borrowing to ensure its user’s additional revenue streams, since not every user is willing to expose their own funds to the impermanent loss risk of traditional liquidity provision. Plus liquidity providers are entitled to receive swap fees.

Additional unique perks of PowerPool’s indexes are the possibility for users to swap between governance tokens directly. Also, enables meta-governance, by simply using pooled tokens for voting in their native ecosystems, thus having a chance to participate in their governance.

Another specialty of the platform is that its community is able to change token sets, their weights, as well as fees via governance proposals. This feature — an unconventional one for what is traditionally perceived as a market index — provides the power of influencing the market directly to the index’s holders.

PieDAO

PieDAO is an index platform that functions in a form of decentralized autonomous organization. It allows users to allocate their assets to create tokenized indices. Users of the platform can use the index tokens to mint the native platform’s governance token DOUGH.

Similar to PowerPool’s scheme, DOUGH token enables their holders to make key decisions regarding PieDAO’s pools including index composition assets’ weightings, risks, rights, fees, etc. Active automated yield-generating strategies are in place, too.

Just like PowerPool, PieDAO pools operate based on tweaked and managed Balancer AMM with additional safeguards and certain governed readjustments as mentioned above.

PieDAO is not just about DeFi governance tokens but also offers balanced exposure to other prominent crypto assets like Bitcoin and Ethereum, as well as offers various options in terms of risk/reward ratio. Plus, it offers risk-mitigating indices for tokenized versions of BTC and USD. Recently the NFT index was added providing a complete exposure to the Metaverse and NFTs.

DeHive

DeHive offers several fully decentralized, market regulated, and economically justified crypto indexes.

Unlike the above-mentioned decentralized index protocols, DeHive’s functionality is not an AMM-based Balancer fork. Instead, the index is driven by an economic model similar to legacy finance indexes, based on the market pairs principle. The absence of AMM technology enables much higher security of DeHive indexes and platform users.

The index composition token selection is made covering various areas of the crypto market, as well as several DeFi aggregators and liquidity pools. The weights of assets in the index pool are based on financial econometric equations not only to build an optimal scientifically justified portfolio for its users but also to serve as a more objective economic metric for the ever-expanding crypto and specifically DeFi market.

Naturally, the protocol offers additional cash flows for its holders, utilizing various yield farming opportunities for underlying assets. As a result, users get stable profit with extremely high APY and can benefit from DeFi even at times of market recession.

Conclusion

Overall, the decentralized index market looks very promising and most likely is set to become the next big thing for DeFi and crypto markets as a whole. It is a no-brainer to anticipate an explosive absolute and relative growth of TVL and AUM in the sphere.

Eventually, the index market is doomed to overtake leadership for all types of crypto investors, similar to the case in the traditional financial markets.

Now is the time to start paying close attention to the projects in the index scene. Although we are very early to the party here, we already have a lot to choose from. However, if you believe that the true index should originate from the DeFi 2.0, make the whole liquidity work, stay secure and automized, then DeHive should definitely be your favorite in this race.

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