Play with DeFi and diversify your investments. Learn about popular DeFi indexes in one article

Anyone can allocate their money to an index, such as an ETF or mutual fund, to gain exposure to a diverse portfolio of assets and earn competitive returns to the broader market. It requires little knowledge from the investor, and is undoubtedly an "allocate and forget it" investment method at its best.

As DeFi becomes more fundamental to the broader crypto market, it would be wise for any crypto investor to have a small allocation through this new financial model.

But for those with a firm understanding of decentralized finance (DeFi) and the nuances behind each protocol, which tokens have attractive economic designs can be cumbersome to some and a mystery to others.

This is where the value of index investing comes in. Index investing doesn’t actually require you to know too much about a particular asset, but more about the broad impact of the industry you want to buy into. For example, you don’t need to be nuanced about biotechnology and biomolecular processes to know which companies are the best to invest in. You can simply buy the SPDR Biotech ETF and then get exposure to innovation in that industry.

While the number of crypto indices is small and they vary widely from one another, a number of new DeFi-specific indices have launched over the past few months, making DeFi innovation accessible to anyone.

Even better, with the rise of liquidity mining, many tokenized indices offer additional returns to liquidity providers (LPs). Notably, they all have an ETH pair.

Therefore, by becoming an LP of the DeFi Index, your portfolio will hold an ETH allocation as well as a basket of DeFi tokens while earning a high passive yield; this makes this index one of the most attractive investment opportunities for DeFi and ETH longs.

So let’s explore the current state of the DeFi Index and the opportunities it holds.

Take a look at the popular DeFi indexes in the market

The following DeFi indices will be introduced in order of market capitalization from large to small

Set Protocol DPI

• Market cap: $14.5 million

• Number of assets: 11

• Largest allocation: Maker’s MKR, 15.5%

• Minimum allocation: Augur’s REP, 1.9%

• Is there liquidity mining: Yes — INDEX

• Fees: 0.95% per year

Created in collaboration between DeFi Pulse and Set Protocol, the DeFi Pulse Index (DPI) is a market cap-weighted index covering the top DeFi tokens in the space.

The largest assets in the index include Maker (MKR), Aave (AAVE), Synthetix (SNX), yEarn (YFI), and Uniswap (UNI), which together account for 66.7% of the index. These assets are leaders in their respective fields, so knowing that most product portfolios contain "blue chip tokens" makes it relatively safe to hold these tokens. The index also includes some newcomers in DeFi, such as Balancer and Ren, which were only launched in the middle of this year.

It is important to point out that all assets held in DPI are actually redeemable for the underlying asset, which means that you can always redeem 1 DPI of the underlying token.

DPI also offers attractive liquidity mining opportunities in the recently launched Index Coop, a decentralized cooperative dedicated to building and maintaining an ecosystem of crypto index products.

Investors can provide liquidity for the ETH/DPI pool on Uniswap, pledge it to the Index Coop Farm for liquidity mining, and receive rewards in the native token INDEX, with an APY of approximately 65%.

PieDAO DeFi + L (Large Cap)

• Market value: $1.4 million

• Number of assets: 7

• Largest allocation: LINK, 18.8%

• Minimum allocation: COMP, 10.8%

• Is there liquidity mining: Yes - DOUGH

• Fee: 0.1% Swap Fee

PieDAO is a protocol for tokenized crypto ETFs governed by a decentralized community.

A notable difference between PieDAO’s ETF and other indices is the degree of concentration in asset allocation.

While sDeFi and DPI include around a dozen assets in their index, PieDAO is more concentrated as its index has 6 to 7 assets - we will discuss concentration and diversification later.

Regardless, PieDAO’s Large Cap DeFi ETF holds 7 assets in its portfolio and is the only index that provides exposure to LINK. Given that Chainlink continues to become an increasingly important part of infrastructure as a decentralized oracle, it’s worth mentioning that the LINK family, LINK Marines, account for 18.8% of its portfolio.

PieDAO also recently released DOUGH, the protocol’s native governance token. Users who provide liquidity to the DeFi + L Balancer pool will receive a high APY in DOUGH tokens, as well as some BAL tokens as a reward for using Balancer as a liquidity source. One final difference is that while the DPI Uniswap pool has a 50/50 pool of ETH, giving investors equal exposure to ETH and DeFi tokens, PieDAO is weighted 70/30, making this liquidity pool more inclined towards this DeFi index.

With this in mind, if you believe DeFi will outperform ETH in the future, then LPs who provide liquidity to the Balancer 70/30 pool will have greater exposure to DeFi returns and less impermanent loss.

Synthetix sDeFi

• Market value: $1.2 million

• Number of assets: 12

• Max allocation: AAVE, SNX, YFI, 15%

• Minimum allocation: NXM, UMA, BAL, CRV, REN, 5%

• Whether to use liquidity mining: No

• Cost: None

Synthetix's sDeFi Index includes 12 assets and is the oldest and most diverse index in the space. In recent weeks, the index has been updated to add YFI, UNI, wNXM, and CRV to the mix while removing ZRX, REP, LRC, and BNT. That said, the sDeFi Index includes some other assets not included in the DPI, such as NXM, UMA, and CRV.

Additionally, unlike the DPI Index, the sDeFi Index is a synthetic asset that tracks the price of an underlying asset rather than being redeemable for all assets — an important distinction for those interested in redeeming their underlying asset index.

While there are no other similar direct liquidity mining incentives, you can always stake SNX to the protocol to mint sUSD and use that capital to buy the sDeFi index, while your staked SNX earns inflation rewards and transaction fee rewards.

However, you must repay your sUSD debt to redeem your staked SNX!

PieDAO DeFi + S (Small Cap)

• Market value: $970,000

• Number of assets: 6

• Largest allocation: UMA, 33.7%

• Minimum allocation: MLN, 2.1%

• Is it liquidity mining: Yes - very good

• Fees: 0% Swap Fees

Similar to PieDAO’s Large Cap ETF, the Small Cap DeFi ETF has a centralized basket of tokens, forcing investors to have higher conviction in the underlying tokens.

Specifically, about 64% of ETFs are made up of just REN (a cross-chain liquidity protocol) and UMA (a broad derivatives protocol). While both assets have performed well since #DeFiSummer2020, you should feel comfortable holding a long position in each given that they make up the majority of your portfolio.

Similar to DeFi+L, the DeFi+S ETF provides an attractive liquidity mining opportunity utilizing a 70/30 Balancer pool where LPs can earn ~118% APY on earned DOUGH while maintaining significant exposure to concentrated bets on DeFi tokens.

For all you venture crypto investors who are bullish on REN and UMA as well as BAL and LRC, this is the ETF you can own.

For those struggling to choose between DeFi+S and DeFi+L, PieDAO recently launched DeFi++, which combines both ETFs into a single, tokenized (and highly diversified) investment vehicle.

Index Performance

Since most of these DeFi indices have only been online for a few weeks and are in the midst of a DeFi bear market, it is difficult to assess historical performance. In any case, here is an overview of the performance of the above DeFi indices over the past few weeks in the bear market:

PieDAO’s Small Cap ETF has been the best performer so far, as the ETF has shielded holders from significant losses in DeFi since its September peak, losing just 5% of its value.

On the other hand, DeFi Pulse’s DeFi Index, which launched at the peak of the market cycle, has performed the worst as it has lost around 36% of its value since inception, performing worse than Synthetix’s sDeFi, which has lost 32% over the same period.

DeFi’s recent rally bodes well for all indices, however, with only a few weeks of data rather than years, it’s too early to tell which ETF is best for you to invest in. So take the current data with a grain of salt.

The bottom line is, it depends on your preference for what each fund holds.

Concentrated vs. Diversified Investing

Buying an index is the best way to gain diversified market exposure. You don’t have to worry about the nuances behind open finance, giving you peace of mind when working with your cryptocurrency portfolio.

But there is a warning here.

While diversification is a great way to mitigate risk, you’re also essentially reducing your potential gains. Making a lot of money through investing isn’t achieved by putting your money into dozens of assets, but by making focused bets. The real money is made when you develop a strong belief in the long-term prospects of one investment and allocate a large portion of your portfolio to it.

This is the investment philosophy of famous value investors Benjamin Graham and Warren Buffett. Graham invested about 25% of his partners' capital in GEICO in 1948 for $712,000, an unprecedented investment allocation relative to his performance and general investment strategy. But 25 years later, the investment was worth $400 million. He was determined about the company's future prospects and acted on it. The final return was good.

If Graham had invested the same amount of money in the S&P 500 over the same period, he would now have a return on his investment of $5.5 million, a good return, but $5.5 million pales in comparison to his belief that one company could succeed and his concentrated investment in it.

So while investing in an index is a viable strategy, especially for those who are new to DeFi and don’t have the time to research each protocol in depth, it’s hard to outperform those who have the knowledge and willingness to take higher risks by investing in a concentrated manner on the belief that a few protocols will succeed in the future.

But in the long run, the numbers will speak for themselves.

For the yield farmers out there, most of the new indices present attractive opportunities to earn high-yield passive income while maintaining exposure to Ethereum and a diversified portfolio of investments in crypto’s hottest sectors.

With PieDAO and Index Coop now effectively competing to create the best cryptocurrency index, 2021 will introduce a slew of new diversified funds to the industry.

So, stay tuned.