In briefIndex tokens like DeFi Pulse let you invest in a bunch of DeFi tokens at once. The DeFi Pulse Index comprises the 10 most popular DeFi tokens available on Ethereum.
Ah, the index fund. Invest in hundreds of stocks at once, like the entire S&P 500, and you can spray and pray your way to conservative financial success within a few decades. So what if Elon Musk crashes Tesla into a wall or climate change snuffs out the oil and gas companies? You’ve invested in the entire market.
Vanguard built an empire by selling low-cost, tax-efficient index funds and ETFs since the mid-70s, and even legendary stock picker Warren Buffett told CNBC that they “make the most sense practically all of the time.”
Now, as an alternative to investing in a niche cryptocurrency yield farm your mother’s son’s father’s dog told you would fly you to the moon, decentralized finance (DeFi) projects are trying to do the same for their own rugged industry.
There are several DeFi index fund providers but they generally all work like this: a DAO or algorithm or company picks a bunch of tokens from the world of programmable finance, combines them into a pot, then sells shares in said pot through a single index token.
The value of the index token reflects the average prices of the tokens in the pot, so buying the index token is comparable (ish) to investing in the entire DeFi market.
The most popular is DeFi Pulse Index (DPI), which lets you gain exposure to a whole basket of top DeFi tokens through a single token.
What is the DeFi Pulse Index (DPI)?
Launched in September 2020, the DeFi Pulse Index consists of the 10 most popular DeFi tokens available on Ethereum: LEND, YFI, COMP, SNX, MKR, REN, KNC, LRC, BAL and REPv2.
Instead of buying all of these DeFi tokens and managing your portfolio yourself, you can just buy a single ERC-20 token that provides exposure to all 10 tokens. The token rebalances monthly to reflect the state of the market.The weighting structure of the DeFi Pulse index on September 14, 2020. Image: Medium
DPI picks its tokens according to a DeFi project’s market cap and re-weights its index on the first day of every month. (More on the methodology used here.)
The token can be used to hedge the market or staked as collateral on lending platforms such as Aave or Compound, or on yield farming protocols.
It’s also far cheaper than buying all the tokens on decentralized exchanges; you only need to buy or sell the token once to invest in the market, saving on Ethereum’s hefty gas fees. However, it’s only a little cheaper than buying all the tokens on regular crypto exchanges. And, since rebalances occur just once a month and the basket is limited to the top 10 tokens on Ethereum, you won’t profit from that crazy one million percent rise of the latest DeFi project on another blockchain.
Where can you buy DPI?
You can buy the DeFi Pulse Index on mainstream crypto exchanges, such as eToro and Crypto.com, as well as decentralized marketplaces like Uniswap.
It’s also compatible with a variety of DeFi platforms and protocols, including Pillar, Zapper and Dharma.
DeFi Pulse Index has partnered with the Set Protocol, which allows for the creation, management, and trading of “Sets,” which are baskets of ERC-20 tokens that represent a portfolio of underlying assets.
What’s the story behind DPI?
The Defi Pulse Index was created by Index Cooperative, a decentralized autonomous organization (DAO) that develops crypto investment products.
The DAO is made up of DeFi experts, business development people, and marketers; DeFi Pulse, Set Labs and the other participants each hold a share of voting rights.The DeFi Pulse Index contains covers 10 deFi tokens. Image: DeFi Plus
Since its launch in October 2020, Index Cooperative has amassed $166 million in assets under management, and earlier this month it passed $1 million in cumulative revenue, according to Lemonade Alpha, one of the DAO participants.
Also this month, the DAO closed a $7.7 million funding round led by Galaxy Digital and 1kx. The devs plan to spend the money on growing the network and developing the protocol.
What’s the future for DPI?
A long-term strategy is crucial; the DeFi Pulse Index is not the only token of its kind and more are rapidly coming onto the market. DPI’s top competitors are currently DeFi Top 5 Index (DEFI5) and PieDAI DeFi Large Cap (DEFI+L).
But the future of indexes such as DPI is tied to DeFi and the wider crypto market, which has seen substantial losses of late. DPI’s current value is $263.14, down 57.6% from its all-time high of $621.21 last May. But it’s not all bad news, because the token is still up 360% from its November 2020 low of $57.20.
Still, it might take more than that for that crypto-hater Buffett to take a punt.