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Are Index Protocols Fulfilling Their Purpose?

Indexing is a time-tested strategy that many passive investors align themselves with in order to capture market averages. One of the many benefits of indexing is that they prove to be a safer avenue in bear markets. This is because an index’s primary goal is to diversify exposure and limit downside risk. Since we are currently in the bear market territory, it is worthwhile to see how index funds perform relative to other assets.

For our comparison, we will use the Vanguard S&P 500 ETF (VOO) and contrast its returns with the returns of the largest and most mainstream stocks on the market. Year to date VOO is down -12.71%. At first glance, this may seem like a lot, but it is important to see how much better or worse an investor would be if they had holdings in individual stocks compared to VOO. Let’s use the FANGMAN (Facebook, Amazon, Netflix, Google, Microsoft, Apple, and Nvidia) stocks to measure the difference in returns.

Facebook (now called Meta Platforms) is down -53.61% YTD, Amazon is down -36.22%, Netflix is down -71.39%, Alphabet (Google’s parent company) is down -23.07%, Microsoft is down -24.20%, Apple is down -25.35%, and Nvidia is down -45.00%,

As you can see from the data above, although the Vanguard S&P 500 has been in the red since the start of the year, not a single FANGMAN stock has come close to outperforming it. Therefore, one can see the purpose and benefit that index funds provide for passive investors.

Seeing the benefits that index funds have provided investors in traditional financial markets, many Decentralized Finance (DeFi) platforms have launched their own index funds consisting of digital assets in the hope of providing investors with a mechanism to invest with minimal risk. However, the performance of these DeFi index funds are surprisingly different compared to traditional index funds.

In order to measure the performance of index funds in the DeFi space, we must compare it to an established and mainstream asset, therefore, we will use Bitcoin. YTD Bitcoin is down 55%. In order to see how much better or worse index funds did in relation to Bitcoin we compiled a list of 14 index funds and their returns:

Play Metaverse NFT Index (PieDAO) YTD: -83.5% spaces makes reading fun

DEFI++ (PieDAO) YTD: -74.2%

BCP (PieDAO) YTD: -65%

PDI (Phuture) YTD: -59%

BED Index (Index co-op) YTD: -66.9%

JPG NFT Index (Index co-op) YTD: -72.6%

DPI Index (Index co-op) YTD: -73.6%

MVI Index (Index co-op) YTD: -84%

DATA Index (Index co-op) YTD: -79%

GMI Index (Index co-op) YTD: -79.1%

BTC 2x Flexible Leverage Index (Index co-op) YTD: -86.3%

ETH 2x Flexible Leverage Index (Index co-op) YTD: -100%

ETH 2x Flexible Leverage Index (Polygon) (Index co-op) YTD: -92.1%

TCAP (Cryptex) YTD: -61.5%

The evidence above clearly suggests that an investor who just held bitcoin would have been much better off compared to an investor holding any of the indices above. This is in stark contrast to the relationship between the Vanguard S&P 500 ETF and the FANGMAN stocks.

This isn’t to say that DeFi should look away from indices as a resource for the passive investor, but instead, DeFi needs to find a way to address the key problems it is facing. One of these problems is that it is currently not possible to calculate the intrinsic value of DeFi protocols.

The FANGMAN companies and all the subsequent companies listed in the Vanguard S&P 500 ETF have cash flowing in and out of the company which can be recorded and measured, which makes it relatively easy to value each company. However, that is not the case with the DeFi protocols since their tokens don’t produce cash flows.

This article was written by one of ours at Synchrony, Jai Gwalani



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Adegbite Mubaraq

Adegbite Mubaraq


Blockchain Copywriter and Marketer |Technical Analyst |Budding Financial Engineer