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List of Xinfengkou DeFi Index Funds

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Why are decentralized funds (ETFs) outpacing their predecessors?

Original title: "The Bull Case for Decentralized Index Funds"

Original source: bankless

Original compilation: 0x26

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These fund products may be one of the drivers of our adoption of DeFi — our way of crossing the chasm. Blackrock now has more than $7 trillion in assets under management and a market capitalization of $100 billion, with much of that growth occurring over the past decade.

A few years ago, building a blockchain-based financial system might have been a cypherpunk Dream, but Ethereum-based financial products are very solid today because they trade billions of dollars every day. Popular DeFi applications include MakerDAO’s Dai, a stablecoin that tracks the U.S. dollar, and Uniswap, a decentralized exchange where anyone can easily swap any Ethereum-based token.

Due to attracting a large amount of human capital, DeFi has become the most invested asset class in the encryption system. As the number of high-quality teams launching compelling DeFi tokens increases, it also becomes very difficult to keep up. In this context, some decentralized index funds have emerged, allowing investors to make passive and diversified investments in the DeFi market. To understand the different approaches to building decentralized indices, let's look at the four most important indices: sDEFI, DEFI++, PIPT and DPI.

Synthetic fixed weight: sDeFi

In November 2019, Synthetix launched an ERC20 token capable of tracking a basket of DeFi tokens. Sidefi is a synthetic asset — it doesn’t hold any underlying tokens, but uses an oracle price feed to track their value. The index consists of nine markers with predefined weights (based on Twitter polls and community feedback). The community votes on weight rebalancing and index composition through Synthetix's governance system on a quarterly basis.

sDeFi is built on the Synthetix protocol, which allows users to create and trade synthetic assets (called synths). These derivatives are essentially derivatives that track the price of a particular asset. Users create synths by depositing collateral (in the form of SNX), and then building synths based on the collateral. Synthetix uses an oracle price feed to determine the value of synths.

Benefits

So far , sDeFi has proven its resilience. It is the oldest DeFi index and has withstood massive crashes like the March 2020 crypto price crash.

sDeFi is built on solid infrastructure. Synthetix is one of the most respected teams in the DeFi industry, and their protocol has processed over $1.5 billion in transaction volume.

Furthermore, rebalancing costs are zero, since the index does not trade assets, but only changes the oracle feed price.

Disadvantages

As of this article At the time of writing, AUM is less than $2 million.

Synthetix-based systems and their oracles (which provide price feeds) are subject to significant counterparty risk.

Liquidity is limited, and most synthetic assets do not receive significant trading volume outside of Synth's own trading system.

Because it is synthetic, it is impossible to redeem for the underlying asset.

Fixed Weight Index: DEFI + + & PIPT

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PieDAO launched in March 2020 with a focus on building the infrastructure to facilitate the creation of tokenized indexes.

Their flagship indices DEFI++, DEFI+l, DEFI+s track a wide variety of DEFI tokens Baskets (collectively referred to here as DEFI++). PieDAO’s index actually holds the underlying tokens—similar to a physical ETF—and is constant-weighted because the weight of each underlying asset is predetermined and the fund is constantly rebalanced as prices change. Updates to the index are voted on by the PieDAO community (discussed in its governance forum).

Constant weight funds are not particularly common because they require constant trading to maintain weight and are expensive to execute. However, the introduction of automated market makers makes constant rebalancing cost-effective. PieDAO's index product is built on Balancer and introduces some novel governance and security features.

Powerpool launched their PowerIndex (PIPT) this month which has many similarities to DEFI++. PowerIndex, also built on Balancer, is used to accumulate voting power in DeFi governance tokens. One notable difference is that the PowerIndex includes CVP, Powerpool’s own token, which is weighted the same as the larger DeFi token. While some are skeptical, others believe that including CVP will align PowerPool with the index’s underlying token.

Benefits

These two Each index generates income through transaction fees, as traders can trade with the associated Balancer pool.

As market capitalization weighted funds tend to concentrate, fixed weight funds have the potential to spread risk more evenly .

The redeemability of the underlying asset.

Disadvantage

Basic balance Counterparty risk in the system (which has been exploited before).

Risk of uncompensated loss.

Fixed weights are a bit arbitrary because you rely on methodologists to choose the right weights.

Market adjustment weight index: Index Coop's DPI

Set and DeFi Pulse launched the DeFi Pulse Index (DPI) in mid-September. The index is weighted by market capitalization, meaning that each asset's weight tracks its market capitalization. The index holds the underlying assets and uses the Set Protocol as its underlying structure. In early October, Set launched Index Coop, a decentralized community organization that will create and manage encrypted indexes.

DPI is rapidly outpacing other indices in terms of assets under management and is now nearly 4x the other index. Part of this is almost certainly due to liquidity mining activities, where index collaborations encourage people to buy DPI. However, DPI may also gain more traction as DeFi Pulse’s participation adds to its credibility.

Index Coop introduces the concept of an "Index Methodologist". He proposes an index and is responsible for rebalancing. While the community has a say, this structure requires each index to have a specific person (or entity) in charge (and they also receive a portion of the fees from the index). This obviously helped attract DeFi Pulse and other solid companies like CoinShares to Index Coop.

Benefits

Market capitalization weight Eliminates human judgment and is almost certainly more efficient than relying on community votes to assign asset weights.

The redeemability of the underlying asset.

Methodologists can increase the credibility of an index.

Disadvantage

Because Set Significant involvement of teams, less decentralization (currently) than other metrics.

Capitalisation-weighted indices can promote concentration risk.

Shortcomings worth emphasizing

Many of the above advantages stem from the low regulatory burden these indices currently face. Guidance from the US SEC states that reliance on third parties is a key factor in determining whether something is a security. Given that decentralized indices are self-executing and not dependent on a central government, they may not be securities. However, this is highly uncertain and it is certainly possible for governments to view these tokens as investment products.

It is also possible that the current rise around decentralization indices is just a blip. There is uncertainty as to whether institutions will be willing to buy unregulated assets managed by the community. If institutional buyers are not interested, there is a fairly low cap on the dispersion index in the market.

Finally, DeFi tokens are still highly correlated—it’s still unclear whether the index can significantly diversify risk.

Summary

Decentralized Defi is a textbook use case for DeFi. They are able to leverage smart contracts and permissionless financial instruments to provide a better user experience, more liquidity, and lower costs.

I believe they may be one of the first DeFi products to cross the chasm and appeal to a mainstream audience. Given the truly astronomical size of the ETF market, I expect innovation here to continue apace in the future.

The author’s note, in the stock market, ETF is to diversify risks, while in cryptocurrency In the market, the homogenization is extremely serious, and the price correlation of various tokens is very high. When users choose a decentralized ETF index, they need to understand the principles behind it in detail to avoid unnecessary losses due to the first-mover advantage and poor information of other users.

Rhythm note, Regan Bozman (original author) holds BTC, ETH, DPI, INDEX, SNX and CVP. At the same time, Regan Bozman is also an investor in Set Labs and an active member of the Index Coop community. This article does not constitute legal or financial advice.