Another week, another yield farming opportunity in DeFi! As gas prices have held above 100 Gwei, we’re all feeling the need to find set-and-forget yield farming strategies so today we’re going to cover a newer DeFi protocol for creating indexes on Ethereum, which offers liquidity mining rewards for simply holding the indexes.
From a traditional finance perspective, index funds are a useful type of exchange-traded-fund (ETF), as they are passively managed using preset rules that, in their typical form, assign weights to assets proportional to their market caps. Index funds allow anyone to easily increase or decrease exposure to a market by trading a single asset, and they consistently outperform actively managed funds and most individual stocks in TradFi.
We’ve all heard epic stories in crypto of “I bought X token at a few cents and now it’s up 100X” but the truth is: most people are very bad at picking tokens, stocks, etc. That’s why these new DeFi indexes are a better way to gain exposure to the upside of a newer market without having to essentially gamble as a newcomer or spend countless hours studying the markets.
In Wealth Mastery, I’ve previously covered the growth of DeFi indexes like the DeFi Pulse Index (DPI), PieDAO pies like DEFI+L or DEFI+S, and PowerPool’s indexes like PowerIndex Pool Token (PIPT). With DeFi indexes, one can hold a basket of auto-rebalancing tokens weighted by market cap, as seen with DPI boasting a $118M in market cap holding 11 DeFi related tokens vs a smaller, newer index like the PowerPool’s PIPT holding 8 tokens, split evenly at 12.5% each by weight, and just under $14M in market cap.
Indexed Finance and NDX Liquidity Mining
Launched in mid-December 2020, Indexed Finance is a newer community that creates DeFi indexes, similar to the Index Coop but by an anonymous team. Indexed Finance is a decentralized protocol for passive portfolio management on Ethereum.
Indexed Finance is managed by the holders of the governance token NDX, which is used to vote on proposals for protocol updates and high level index management such as the definition of market sectors and the creation of new management strategies.
The index pool contract is based on Balancer, with some changes that allow the pool to have target weights for the underlying tokens and to adjust the portfolio’s composition toward the targets over time as swaps are executed. This removes the necessity of rebalancing which underpins ETFs in TradFi.
Targets are set with a modification of the traditional market-cap-weighting formula used by many index funds. The formula used by pools weights the tokens by the square root of their market cap, which aims to achieve a better representation of DeFi markets (ie a list of 10 tokens can have an order of magnitude difference between the highest and lowest market caps).
If you buy into the idea that a DeFi index may be an optimal strategy for the average user to invest in a diverse range of assets, then you might be particularly interested in Indexed Finance because their liquidity mining program pays you to either hold 1 of the 2 indexes or provide liquidity.
The 2 indexes currently available from Indexed Finance, each using a market-cap-weighted approach are:
- (CC10) Cryptocurrency Top 10 Index with a market cap of ~$28M composed…
Hi! My name is Lark Davis!
I’m a cryptocurrency investor with years of experience and I’ve been making consistent profits in the crypto space.
I’m passionate about helping others do the same, so I run multiple educational channels on crypto investing.
