Decentralized Indices
What is a decentralized index?
If you know what an ETF in traditional finance is, then you would understand how decentralized indices work. An exchange-traded fund (ETF) is a type of pooled investment security that tracks other assets, such as equity indices, bonds, and commodities. An ETF is typically a collection of multiple assets and can be traded on an exchange like a stock.
DeFi indices allow you to invest in crypto assets without monitoring your positions all the time. Also, it is the best and most popular way of getting a diversified exposure to the crypto market. To invest in a DeFi index requires you to buy index tokens which represent your share of index fund. Your investment will appreciate or depreciate according to changes in the price of the index token.
Index Providers
IndexCoop
The biggest player in the sector is Index Coop founded by Set Labs Inc. in 2020 October. As of this writing, Index Coop has 6 indices: DPI (DeFi Pulse Index), GMI, BED (Bitcoin, Ethereum, DPI), MVI (Metaverse Index), JPG, DATA.
DPI, the index with the largest market cap, has been developed by Index Coop and DeFi Pulse, a DeFi data provider. DPI is a capitalization-weighted index containing 13 tokens at the moment. It has been designed to track the performance of DeFi projects which have “significant usage”. To be included into the index, a token should meet several requirements across four dimensions. For example, the token should be available on the Ethereum blockchain, and one should be able to predict its supply over the next five years. Some of underlying tokens of DPI are UNI, MKR, AAVE, and SNX.
BED is an equal-weight index containing the three presumably most important members of digital assets industry: Bitcoin, Ethereum, and DeFi. It allows you to get a passive exposure to the largest cryptocurrencies.
If you like the idea of Metaverse and want to invest in it but don’t know exactly which token to choose, MVI is the index for you. It focuses on the tokens which are in one of the following categories on CoinGecko: Non Fungible Tokens, Entertainment, Virtual Reality, Augmented Reality and Music. MVI is composed of the tokens of the premier Metaverse projects, such as Sandbox (SAND), Decentraland (MANA). If you love blockchain games, then this is the index you would consider buying because it contains Illuvium, Yield Guild Games and Axie Infinity.
In conclusion, decentralized indices give you a passive exposure to crypto assets through various themes, such as DeFi, Metaverse, NFTs, and oracle networks. By getting diversification you’ll decrease your risk. But don’t forget that this will also limit your gains because instead of making concentrated bets on 1–2 tokens, you’ll invest in the basket of tokens some of which may not perform as others.
