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DeFi Indices: Decoded by Notum Research

By Notum

Jul 24, 20238 min read



Index investing was an integral part of traditional financial markets for years. The U.S. stock market offers investors a wide range of different indices, such as the S&P 500 and the Dow Jones Industrial Average. For instance, the S&P 500 is a stock index that includes shares from 500 publicly traded companies with the highest market capitalization on U.S. stock exchanges. On the other hand, the Dow Jones Industrial Average tracks the average price of shares of the 30 largest U.S. corporations.

By investing in an index, an investor gains a straightforward way to access the stocks of a group of companies grouped based on specific criteria (industry, market capitalization, etc.). Importantly, investing in indices is an effective method of risk diversification since the index consists of a broad basket of assets, rather than a few individual investments. This leads to the minimization of unsystematic risk associated with specific companies without reducing expected returns. 

Roots of DeFi Indices

Decentralized finance (DeFi) has become an alternative to the banking sector and traditional technologies in the current financial system. DeFi provides access to financial infrastructure for anyone interested, without the need for KYC (Know Your Customer), censorship, credit scoring, and so on. Open-source protocols offer access to various markets, such as lending, exchanges, insurance, and more. DeFi indices are no exception. These indices allow investors to hold a single liquid asset, which consists of various cryptocurrencies or strategies. Indices can cover both the entire cryptocurrency market and specific segments based on certain methodologies.

The first cryptocurrency index appeared in 2017 and was called the "Bitwise 10 Crypto Investment Fund (BITW)." BITW consists of the "10 most highly valued cryptocurrencies screened and monitored for certain risks weighted by market capitalization, and rebalanced monthly." This index offers American investors the opportunity to access cryptocurrencies through traditional brokerage accounts. It is worth noting that BITW is a centralized index fund, which means it is associated with counterparty risk, i.e., the risk of the other party failing to fulfill its contractual obligations.

On the other hand, decentralized index funds, while not completely eliminating this risk, help to reduce it. Operations are automated and executed through smart contracts not through a fund manager. 

Management of DeFi indices is carried out by providers of these indices and typically works as follows: a DAO (Decentralized Autonomous Organization), algorithm, or company defines a set of tokens that will be included in the index, pools them together, and then sells shares in this pool through an index token. The value of the index token reflects the average price of tokens in the pool, so buying such a token is comparable to investing in a basket of assets included in the index. For managing the index including rebalancing, the provider charges a small fee, usually not exceeding 1% of the portfolio's value.

The key DeFi indices available in the market can be found on Notum under the "DeFi Indexes" section.

DeFi Pulse Index

If you're interested in the DeFi ecosystem, the DeFi Pulse Index (DPI) might be an option to consider. It offers a diverse view of DeFi tokens, ranked by their market cap. This structure provides a balanced exposure to key players in the DeFi space. The DPI design caps each token's representation at 25%, ensuring risk management and better diversification of your crypto assets.

The index composition includes blue-chip tokens from the DeFi world.

DPI is managed by The Index Coop, a decentralized autonomous organization (DAO), and the largest provider of on-chain structured decentralized finance (DeFi) products. Index Coop's products have undergone a series of audits, including those conducted by well-known companies such as OpenZeppelin.

Tokens included in The DeFi Pulse Index undergo careful selection based on various criteria. For example, the token must be available on the Ethereum blockchain, and it should not be considered a security in different jurisdictions. Additionally, the project must be widely recognized as building a useful protocol or product. Projects focused on competitive trading/holding, suspected in having Ponzi characteristics, or primarily serving entertainment purposes will not be included. Index rebalancing happens once per quarter, in January, April, July, and October.

Over the last 30 days, DPI has shown a return of 38,2%, significantly outperforming ETH's return for the same period, which was 10.2%.

Interest Compounding ETH (icETH)

Investing in the Interest Compounding ETH Index (icETH) offers the opportunity to multiply staking returns through a leveraged liquid staking strategy. By utilizing Set's infrastructure, icETH enhances staking rewards for Lido stETH while minimizing transaction costs and risks associated with collateralized debt positions. Holding icETH tokens allows for exposure to ETH price movements while potentially amplifying staking returns by up to 2.5x.

icETH aims to provide token holders with leveraged exposure to Ethereum staking rewards, utilizing automated leverage management to reduce risk and the need for manual management of a leveraged position. The icETH token is deployed on the mainnet of Ethereum. In this process, stETH is deposited into Aave as collateral to borrow ETH. The borrowed ETH is exchanged for additional stETH, which is then deposited back into Aave to create the leveraged position. As long as the stETH staking yield is higher than the cost to borrow ETH on Aave, the strategy is profitable in ETH terms. Fluctuations in the stETH:ETH conversion rate can also impact profitability.

Like DPI, icETH is also managed by The Index Coop. The index is rebalanced every 4-6 months.

Alongside Crypto Market (AMKT)

The Crypto Market Index (AMKT) includes the top 25 crypto assets, allowing you to track and participate in the broader cryptocurrency market, making informed investment decisions to enter the market at the right moment. AMKT is rebalanced monthly and reconstituted quarterly to reflect the evolving market conditions. By investing in AMKT, you can gain diversified exposure to the cryptocurrency market, capturing its overall performance and potential growth.

AMKT is always backed 1:1 with its constituents. The objective of AMKT is to provide index token holders with the assurance that the index is always backed by the assets it claims to represent. The contents of custodial accounts are transparently published in real-time. You can find a real-time dashboard of the reserves backing AMKT on the AMKT Reserves page.

The AMKT Token represents a basket of digital assets designed to track the market capitalization of the crypto asset market. The index itself was launched recently on January 12, 2023, and it is rebalanced on a quarterly basis. Over the last month, the Crypto Market Index has shown a return of 13.67%.

Advantages of DeFi Indices

Diversification: DeFi indices provide access to a diverse range of DeFi tokens and protocols, allowing investors to gain exposure to different projects and diversify their portfolios. This helps reduce risks associated with specific assets.

Simplicity: Investing in a DeFi index simplifies the portfolio management process, as investors do not need to analyze and select individual tokens. Instead, they can invest in one index and gain exposure to the entire DeFi market.

Risk Management: The diversity of DeFi protocols in the index helps mitigate risks associated with potential issues or failures in individual projects. If one project faces problems, the success of others may offset losses.

Gas Fee Savings: By investing in a single fund, DeFi users can save on gas fees that they would have incurred when purchasing multiple tokens individually. In a decentralized network, users can buy and sell their holdings at any time, unlike assets within the traditional finance world.

Liquidity: Depending on the method of investing in a DeFi index, investors may have access to liquidity and the ease of buying/selling tokens comprising the index on various cryptocurrency exchanges.

How to Invest in an Index?

Investing in DeFi indices has become very straightforward thanks to Notum. Let's go through this process step by step.

Step 1. Access the "DeFi Indexes" Section on Notum

On the platform's website, navigate to the "DeFi Indexes" section, where you will find a complete list of available indices for investment. Here, you can also view key characteristics of each index, such as the network, APY (Annual Percentage Yield), price change in the last 24 hours and 7 days, and more.

Step 2. Open the Selected Index Page

After choosing a suitable index, you need to access its page to review more detailed information about the index. For example, the index page provides insight into the investment strategy, allowing you to understand how the portfolio of assets in the index is formed. Additionally, you can explore the index's composition, including which assets are included and in what proportions.

Step 3. Purchase the Index

You can purchase the index with just one click directly from the selected index page. To do this, simply choose the currency for the purchase in the exchange window. Notum's infrastructure will then handle the necessary actions to exchange your token for the index. The investment process with Notum is easy, straightforward, and can be completed with just one click.

Closing Thoughts

DeFi indices play a significant role in the world of decentralized finance, providing investors with several notable advantages, the main ones being diversification and simplicity of investing. DeFi indices allow investors to hold a single liquid asset composed of various cryptocurrencies or strategies. 

This strategy can be attractive to different types of investors, but it is particularly well-suited for the following categories:

  • Newcomers in the world of cryptocurrencies and DeFi. Investing in DeFi indices can be a good option for beginners who are just starting to explore the cryptocurrency market. This strategy allows gaining exposure to diverse DeFi projects while minimizing the complexities of analyzing and choosing individual assets.
  • Investors seeking portfolio diversification. Decentralized finance offers unique opportunities for portfolio diversification. Investing in DeFi indices allows spreading investments across different DeFi projects and sectors, reducing risks and increasing growth potential.
  • Investors with limited trading experience. Cryptocurrency trading can be complex and require specific skills. For investors with limited experience who prefer to avoid active management of their investments, investing in DeFi indices may be a more attractive option.
  • Investors interested in new technologies. DeFi is an innovative area that is rapidly evolving. Investing in DeFi indices allows active participation in this development and support for innovative projects and solutions.
  • Investors seeking liquidity. DeFi indices typically have good liquidity on decentralized exchanges. This means that investors can easily buy and sell index tokens at current market prices.


Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.