Crypto indices are a financial instrument that tracks the performance of a basket of cryptocurrencies.
These indices are created in accordance with certain themes and are typically weighted by market capitalization. For example, an index can track the top 25 crypto projects per market cap, or track the top decentralized finance (DeFi) projects per market cap, and so forth.
As such, the price performances of the cryptocurrencies within an index determine the floating value of that index on a rolling basis. In other words, the price of an index will increase or decrease depending on whether its constituent assets increase or decrease in value over a specific period of time.
The advantages of crypto indices
Cryptocurrency indices offer efficient and cost-effective experiences when it comes to trading crypto, as they allow investors to deal with a single instrument rather than having to manually trade through multiple assets in consecutive fashion.
Accordingly, crypto indices are also excellent avenues for granting all types of investors easy, targeted portfolio exposure to popular or emerging cryptoeconomy trends, e.g. NFT projects in the case of an NFT-centric index.
Another salient advantage of crypto indices is that they allow investors to diversify risk across a range of assets simultaneously, thus mitigating the chances of being overly exposed to a single token at any given time.
Who makes crypto indices?
Over the past couple of years, interest in crypto indices has blossomed around both traditional finance and DeFi circles.
This reality has led to everything from TradFi titans releasing crypto products, like the S&P Cryptocurrency Broad Digital Market Index, to crypto-native projects developing tokenized indices for DeFi. Between these two poles are the in-house indices created by popular centralized crypto exchanges like Binance and FTX.
Top DeFi crypto index projects
Index Coop is a decentralized organization that facilitates the creation of tokenized crypto indices via the V2 infrastructure of Set Protocol. The group’s governance matters are decided by holders of the project’s $INDEX token, while the methodologies of the organization’s indices are provided by top cryptoeconomy and DeFi authorities like DeFi Pulse.
The DeFi Pulse Index ($DPI)
A collaboration between Pulse Inc and Index Coop, the DeFi Pulse Index ($DPI) is a capitalization-weighted index that currently tracks the performance of 15 top Ethereum-based DeFi tokens. The ERC-20 token, whose constituent assets can fluctuate, was created to provide investors with one-stop simplicity and efficiency for allocating into the most popular DeFi projects of the day.
The Metaverse Index ($MVI)
Developed by community methodologists at Index Coop, $MVI is an index product that offers investors exposure to a tokenized basket of NFT-centric projects around Ethereum’s blossoming culture and entertainment verticals.
The Ethereum Flexible Leverage Index ($ETH2x-FLI)
$ETH2x-FLI (Ethereum Flexible Leverage Index), another collaboration between Index Coop and DeFi Pulse, is a structured product that allows holders to easily leverage $ETH. The token facilitates such leverage by “abstract[ing] collateralized debt management into a simple index” composed of Compound ETH (cETH) and the $USDC stablecoin.
The $BTC 2x Flexible Leverage Index ($BTC2x-FLI)
$BTC2x-FLI (Bitcoin Flexible Leverage Index) works similarly to the aforementioned $ETH2x-FLI token except it provides leverage on the BTC price and thus relies on Compound Wrapped Bitcoin (cWBTC) instead of cETH.
The Bankless BED Index ($BED)
Proposed by Bankless and created by Index Coop, $BED is index token designed to grant investors exposure to the cryptoeconomy’s top assets via a single-token basket composed of ~33.3% $ETH (via Wrapped ETH), ~33.3% $BTC (via Wrapped BTC), and ~33.3% DeFi (via $DPI).
Indexed Finance is a decentralized protocol focused on providing passive portfolio management strategies via index tokens. The project facilitates its indices through capitalization-weighted liquidity pools dubbed “index pools.” These pools automatically rebalance themselves and behave similarly to traditional index funds. Some of the protocol’s top products right now are $DEFI5, an index tracking five of the largest DeFi tokens, and $DEGEN, an index tracking a basket of smaller, and thus riskier, tokens.
PieDAO is a decentralized organization that creates PIEs, i.e. crypto indices. Two of PieDAO’s most popular indices to date have been $PLAY, an index of NFT-centric projects and tokenized NFTs like NFTX’s $PUNK token, and $DEFI+L, an index of eight of the largest DeFi assets per market capitalization.
Stablecoin indices optimize stability
Some projects also exist, like mStable’s $mUSD and DefiDollar’s $DUSD, that serve as indices of stablecoins. These assets don’t offer price exposure to a range of volatile DeFi tokens but rather to superior price stability by being underpinned by multiple stablecoins at once. This model allows users to mint and use “meta-stablecoins” like $mUSD and #DUSD by depositing other stablecoins like $DAI, $USDC, and $USDT into the relevant protocols.
Create your own indices with Set Protocol
The Set Protocol V2 system supports a Create a Set functionality so users can build customized indices according to their own desired allocations and parameters. This feature allows anyone with an Ethereum address and enough $ETH to cover gas to become an on-chain asset manager. For a complete guide on how to create a crypto index with Set Protocol, check out the project’s “Set Creation” primer.
The risks of decentralized crypto indices
Cryptocurrency index products face three main categories of risk: market risk, regulatory risk, and structural risk.
- Market risk entails the possibility of investors losing money if the assets within a crypto index decline.
- Regulatory risk involves the threat of an influential government regulator, e.g. the Securities and Exchange Commission (SEC) in the U.S., deeming crypto indices as unregistered
- Structural risk stems from using tokenized products on the Ethereum blockchain, where frictions like smart contract exploits and transaction congestion are possible.securities.