Can DeFi indices finally make crypto-based passive investing worthwhile?


Index investing in the stock market has become extremely popular thanks to the proliferation of exchange-traded funds, or ETFs, which often track popular market indices like the S&P 500 or the Nasdaq-100.

Investing in the entire market can be a simple, but effective, strategy. Instead of spending energy and time on trying to beat it — often unsuccessfully — investors are guaranteed average returns, which in the past 10 years have been more than respectable both in stocks and in crypto.

The rise of decentralized finance in the summer of 2020 seems to have reinvigorated the concept of passive investment in crypto. In addition to creating a new well-defined category of crypto assets, it has boosted the infrastructure required to create something analogous to a crypto-native ETF.

Several projects and platforms launched their own DeFi indices in 2020. Some, such as the FTX DeFi perpetual contract or Synthetix’s sDEFI, are derivatives products based on synthetic contracts. They simply track the price of a basket of assets, without owning the underlying tokens.

But DeFi grants the possibility of creating something much closer to an ETF. These types of funds always own the underlying basket of assets that they are supposed to track. At the end of each trading day, some large institutions have the privilege of creating or redeeming shares of the ETF for its net asset value. They create new shares and sell them if the ETF is more expensive than the assets it holds, and they redeem existing shares if it’s worth…



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