Indices – or indices – help us understand the world. By grouping similar things together into a category, they are easier to track, whether it is a genre of literary fiction or precious metals. In the context of financial markets, indices are not only useful for tracking similar things: they are useful for trading them, allowing investors to access a diversified basket of assets through a single mechanism.
While synonymous with traditional finance (TradFi), where indices are a benchmark for markets like the S&P 500, Dow Jones Industrial Average (DJIA), and FTSE 100, they are now starting to appear on-chain, allowing DeFi users to track entire sectors of the crypto economy. And thanks to tokenization, it is also possible to trade these indices by purchasing a single token instead of multiple ones. The rise of crypto indices, bringing this staple of TradFi to DeFi, has expanded the opportunities to earn on-chain while diversifying risk.
An index for everything
As early as 2021, DeFi developers were experimenting with tokens that tracked the price of a basket of crypto assets, but with mixed results. Over the past 12 months, however, rapid growth The rise of tokenized real assets (RWA) has fueled a rise in indices that allow users to track and passively invest in the RWA sector. One of the first web3 projects to produce an RWA index is financial data provider Truflation. Coverage index includes a weighting of RWAs including stocks, precious metals, commodities and currencies, and is one of many cryptocurrencies index it is created.
For DeFi users, the ability to view indices dedicated to a specific sector makes it easier to monitor performance in real-time and see how it compares to other investment classes. But for individuals who don’t want to just watch, crypto indices can also be traded directly, allowing you to “get in the game” without having to worry about which specific assets to buy and how they’re weighted.
Not all indices are designed to be actively traded on an ancillary basis; CoinDesk DeFi Indexfor example, provides a reference point to guide investors. They use it as a benchmark, in other words, before deciding which DeFi assets to invest in – or whether they should invest in them at all – based on its performance.
Making the Case for Crypto Indices
There are many reasons why investing in an index can be interesting for crypto users. On the one hand, it can provide a solid diversification strategy. Selecting a basket of DeFi assets, for example, reduces risk since if one token underperforms, losses will be minimized. At the same time, if the entire sector outperforms the rest of the market, the upside remains unlimited.
The other main reason why assets are attractive to crypto investors is that they provide easy access to a particular industry without having to become an expert on it. You can be bullish on AI without knowing exactly which AI stocks or tokens are likely to perform best, and an index solves this problem.
The growth of tokenized RWA, coupled with a trend in DeFi to reimagine the best elements of TradFi, has made indices an investment vehicle whose time has come. Greater availability of onchain data means that web3 builders now have a wealth of options at their disposal, including the ability to create indices that integrate on-chain and off-chain prices. As a result, expect to see new crypto indices pop up covering everything from commodities to memecoins. If something can be categorized, it can and will be indexed.
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