In actualizing unprecedented yield-bearing systems (e.g. yield farms), Ethereum’s decentralized finance (DeFi) ecosystem took the cryptoeconomy by storm in 2020. That said, there’s been an unsurprising rush to own DeFi governance tokens – which are used by communities to govern protocols in decentralized fashion – in recent months.
However, in the past it wasn’t a streamlined process to take up positions in multiple DeFi tokens: you’d have to trade into each individual token one by one, which would take a decent amount of time and be inefficient cost-wise. Indeed, with Ethereum gas prices being acutely high lately, it can cost between 0.01 to 0.2 ETH to get trades executed “Fast” on decentralized exchanges right now.
That’s where DeFi token indexes come in. Ethereum’s answer to exchange-traded funds (ETFs), DeFi indexes are baskets of DeFi tokens that allow investors to get exposure to the upside of the DeFi arena by simply buying a single token. Alas, these products let investors trade in and out of DeFi efficiently and affordably. Moreover, courtesy of DeFi’s signature traits such tokens can be traded permissionlessly and around the clock unlike their mainstream ETF cousins.
Yet there’s no doubt that DeFi’s index sector is still very young, and we’ve only just begun to see the ways that decentralized communities will develop and manage such indexes. Accordingly, in today’s post we’ll be looking at the biggest DeFi index tokens to date to get a better sense for where the sector’s at now and where it may be heading.
Current tokens: YFI (15%), AAVE (15%), SNX (15%), UNI (10%), COMP (7.5%), MKR (7.5%), WNXM (5%), UMA (5%), REN (5%), KNC (5%), BAL (5%), CRV (5%)
Current AUM: ~$1,150,000 million USD
Price per token:~$2,150
sDEFI is an index token developed by the community of the leading on-chain synthetic assets and derivatives project Synthetix that represents “the price performance of a basket of leading tokens in the decentralized finance space.”
Notably, sDEFI can only be purchased on the Synthetix Exchange with Synthetix’s native stablecoin, sUSD. To this end, as sDEFI grows more popular with investors, then the value propositions of sUSD and Synthetix Exchange will be enhanced, as these are the only means to obtain sDEFI. As such, sDEFI is not only an attractive financial instrument covering the performance of the DeFi market, it’s also a unique value proposition of the Synthetix project in general.
Another important point: sDEFI rebalances automatically occur, so traders have to exit from their positions beforehand if they want to avoid migrating to a new portfolio.
Current tokens: LINK (~18.78%), YFI (~18.42%), AAVE (~16.34%), UNI (~13.18%), SNX (~12.68%), COMP (~10.65%), MKR (~9.91%)
Current AUM: $1.4M
Price per token: ~$0.80
Officially dubbed “PieDAO DEFI Large Cap,” DEFI+L is an index token produced by the decentralized and index-focused PieDAO group that currently tracks the price performances of 7 of the largest DeFi assets per market capitalization.
At the moment, PieDAO is incentivizing users to take up positions in DEFI+L by offering $DOUGH (the native token of PieDAO) liquidity mining rewards to DEFI+L/ETH liquidity providers (LPs) on both Balancer and Loopring Exchange, the latter of which is powered by layer-two (L2) zkRollup tech.
Current tokens: BAL (~12.21%), LRC (~14.72%), REN (~19.54%), UMA (~47.74%), PNT (~3.25%), MLN (~2.60%)
Current AUM: $0.9M
Price per token: ~$1.50
“PieDAO DEFI Small Cap,” or DEFI+S, is an index token that tracks the price performance of smaller DeFi markets per market cap. In this sense, it’s structured similarly to the DEFI+L token, with the main difference being that DEFI+S is riskier and may have more upside because smaller projects are involved. Token standouts in this portfolio include Balancer’s BAL, Loopring’s LRC, UMA Protocol’s UMA, and Ren Protocol’s REN.
DeFi Pulse Index
Current tokens: MKR (~16.58%), AAVE (~13.04%), SNX (~12.25%), UNI (~11.99%), YFI (~11.11%), COMP (~10.61%), REN (~7.96%), LRC (~6.04%), KNC (~5.35%), BAL (~2.79%), REP (~2.27%)
Current AUM: ~$14.7M
Price per token: ~$66
DeFi Pulse is one of the premier data providers for all-things DeFi. That’s why heads turned in September 2020 when the DeFi Pulse team teamed up with automated token manager Set Protocol on the DeFi Pulse Index, an index token tracking the performance of the data provider’s curated token picks. In this sense, this index is automated (when it comes to rebalances) but it’s also manually curated by the DeFi Pulse team. The token has quickly gained popularity on account of DeFi Pulse’s respect in the space.
Current tokens: UNI (39.80%), AAVE (17%.86), COMP(17.52%), CRV (13.32%), SNX (10.14%), MKR (1.36%)
Current AUM: ~$20m
Price per token: ~$143
DEFI5 is an index developed by Indexed Finance tracking the DeFi “blue chips”. At the time of writing it consists of UNI, CRV, AAVE, COMP, SNX and MKR. It has been the best performing DeFi index year to date, increasing by over 450% since January.
With Indexed, the underlying tokens are held in AMM pools. The entire re-weighting and re-balancing to continuously track the DeFi market sector happens on-chain. There is no governance involved in the process whatsoever. When a new token project enters the Top 5 of DeFi projects by market cap, it gets automatically added to the DeFi5 index so you never miss out on any up and coming project.
Being held in AMM pools, the tokens also generate swap fees which accrue to the DEFI5 holders and contribute to its performance.
DEFI5 can be bought either on Uniswap (Ethereum) or on Quickswap (Polygon) if you want to avoid the high transaction fees on the Ethereum blockchain.
Lastly, it’s worth noting that DEFI5 doesn’t impose any management or “streaming fee” to holders. There is merely a burn fee which applies when DEFI5 holders want to redeem their tokens against the underlying. This fee can be avoided however, when market selling on Uniswap or Quickswap.
CEX Traded Indexes
FTX is a decentralized cryptocurrency derivatives exchange that offers an array of cryptocurrency-centric financial products, including crypto indexes.
While FTX’s index offerings are too extensive to list comprehensively here, it’s clear that the exchange has placed a strong focus on providing an array of crypto indexes tailored to different styles of crypto investors. Among these products is FTX’s DeFi Index, which includes equal weightings of the following tokens:
AAVE, AVAX, BAL, BAND, COMP, CREAM, CRV, DOT, KNC, LINK, MKR, MTA, REN, REP, RUNE, SNX, SOL, SRM, SUSHI, SWRV, TOMO, UNI, WNXM, and YFI.
Malta-based cryptocurrency exchange giant Binance has also released its own DeFi-themed index asset, the DeFi Composite Index. Notably, it’s the first index product released by Binance Futures, the exchange’s derivatives arm, and it specifically tracks the performance of DeFi tokens listed on Binance proper. The index’s ticker symbol is DEFIUSDT, so the asset is unsurprisingly denominated in the USDT stablecoin. The index tracks the following assets with the following weights at press time:
BAND (~7.55%), COMP (~7.61%), KAVA (~6.95%), KNC (~5.87%), LEND (~10.83%), LINK (~27.36%), MKR (~7.47%), SNX (~7.75%), SXP (~9.12%), and ZRX (~9.49%).
In recent months, we’ve seen growing demand for DeFi governance tokens, and DeFi indexes like the ones explored above offer some of the most efficient and cost-effective avenues for getting investment to the DeFi ecosystem. Expect to see these assets grow in popularity, particularly among mainstream newcomers to the cryptoeconomy, in the months and years ahead accordingly.
Also, the DeFi index token scene is still quite early, so while the products already available are interesting for their novelness, we should also expect to see more complex index-based products in the ecosystem going forward. For example, Economics Design researcher and designer Lisa Tan recently suggested the idea of mixing stablecoin-based yield strategies with riskier index-based strategies into singular DeFi products. This is but a taste of the iterations and innovations to come around DeFi indexes.