How to Invest in DeFi by Buying an Index
Learn how you can gain broad exposure to the DeFi market by buying a DeFi index.
In 1975, Jack Bogle devised the index fund as a way for retail investors to compete with professional investors: the goal being not to outperform the market, but to keep up with it. In the years since, index funds have become so trusted — and performed so well — that they now comprise roughly half of the approximately $9 trillion in total assets held in stocks.
In this article, we give an explanation of what a decentralized index fund is and how you can invest in DeFi by buying an index.
What Is an Index Fund?
An index fund is an investment fund based on a preset collection of assets.
Instead of analyzing individual assets and trying to pick the best performers, an index fund takes your capital and uses it to invest in a basket of assets, all with just one purchase.
Index funds often outperform active investors, while having the added benefit of reduced transaction fees because you only make one purchase for all of your investments.
With gas fees on the Ethereum network being quite high at the moment, this characteristic of indexes becomes even more attractive in the crypto capital markets.
What Is a Decentralized Index?
The same qualities that make index funds a worthwhile investment in traditional markets applies to the decentralized finance (DeFi) market as well.
Instead of trying to pick one winner token, which is hard to predict in advance, you could buy a basket of tokens that has been carefully selected by index methodologists (specialists), giving you a higher chance to achieve good returns. Even if one token performs badly, there are multiple other tokens in the basket to lift up the index price.
Perhaps the most important difference between decentralized indices and traditional ones is that re-balancing and re-weighting is automated on-chain by smart contracts. No human intervention, no fund managers, no management fees!
In traditional finance, you pay a management fee to fund managers who manually adjust the weightings of the stocks held in an S&P 500 Index Tracker Fund, for example.
If the market capitalization of Apple increases, the index will increase its allocation of Apple stock. If a company’s market cap drops and it’s no longer part of the top 500 companies, the fund managers will sell that stock and replace it with the company that has replaced it.
Within a decentralized index, all this happens automatically, and governance token holders can decide on future direction. Imagine you could vote on how Vanguard manages its indices. Impossible right? Not so in DeFi!
Meet Indexed Finance (NDX)
Arguably, one of the hottest in the DeFi space at the moment is Indexed Finance (NDX).
In its first month since launch, DeFi5 increased by 450% and CC10 by more than 250%. But that performance is not all.
When you buy an index from indexed.finance you can stake it and earn $NDX tokens on top. The APY for that currently hovers around 300%!
They will soon launch two new indices namely the $DEGEN (small-cap) index and the ORC (Oracle Token Index). The project is supported by numerous influencers and Molly Wintermute from Hegic is an early investor.
In just one month, the project was able to attract close to $70m in assets under management.
How Do You Buy the Index?
Thanks to Trustwallet, the process of buying one of the index tokens is very easy.
Open the Trustwallet DApp Browser and type in “indexed.finance” in the browser bar. You will then arrive on the home page, where you’ll see the two flagship indices DeFi5 and CC10 featured.
DeFi5 is an index containing five of the so called “DeFi blue chips”: $AAVE, $UNI, $SNX, $CRV and $COMP whereas CC10 tracks the broader Cryptocurrency market and additionally contains $YFI, $MKR, $UMA, $LINK and $OMG.
In terms of popularity, DeFi5 takes the cake with $38 million AUM vs. $30million for CC10. DEFI5 has also outperformed CC10 due to the incredible performance of UNI, AAVE, etc. the past month. However, CC10 could likely outperform in the near future due to the other projects catching up.
- Select the index you want to buy
- Click “Trade”
- Put how much ETH you want to spend
- Press the “Swap” button
- Trust Wallet will show you the transaction fee
- Press “Send”
How to Stake an Index
Now that you own an index token you could decide to take part in the liquidity mining scheme designed by indexed during which 25% of the $NDX token supply is distributed to index holders who stake their index tokens or provide liquidity on Uniswap.
In aggregate, there are 4 pools:
- DEFI5 (simple staking)
- CC10 (simple staking)
- DEFI5-ETH on Uniswap
- CC10-ETH on Uniswap
During Phase 1 of the liquidity mining lasting until March, each pool will receive 625,000 NDX in total.
When you stake your index, you’ll likely receive a bit less $NDX tokens as this option is chosen by more users and largely regarded as less risky.
Alternatively, you can provide liquidity on Uniswap and stake your LP tokens but there are also some risks associated with it, namely Impermanent Loss.
- Open the burger menu at the top and select “stake”
- Select which pool you want to stake in
- Select how much you want to stake
- Approve indexed to move your index tokens
- Wait until the transaction is confirmed on the blockchain
- Deposit your index token
Once you’ve completed all these steps, you can lean back and watch your NDX token holdings grow. As long as your index tokens are staked, you will continue earning NDX tokens. You’re free to unstake your index token or to claim your NDX reward whenever you want.
However, to save on gas costs, it’s probably better to only claim the NDX tokens once you have earned a sufficiently high amount in order to make it worthwhile.
DeFi Indices are a phenomenal investment tool that can provide excellent value while mitigating the cost and some of the risk involved with speculating in selective DeFi assets.
Indexed finance offers you to invest in these various indices in a seamless way and earn governance tokens in the next decentralized Vanguard.