By now, everyone knows that for you to increase your personal wealth, you must invest. Fortunately, today, you don’t even need to be a token-picking expert before you can invest in the exponentially developing Decentralized finance (DeFi) space. Simply investing in a DeFi index will automate your entire investment plan for you.
In 1975, Jack Bogle created the index fund, a practical approach for retail investors to compete with professionals. The aim of this innovation is not outperforming the market; rather to keep up with it. Years later, index funds have grown to become very trusted and are gaining traction. According to a recent study, they now comprise approximately half of the 9 trillion USD of total assets held in stock.
What Is an Index Fund?
This is an investment fund established on a preset assets collection. As an alternative to analyzing individual assets and selecting the best performing, an index fund uses your capital to invest in a basket of assets with just one purchase. Usually, index funds outperform asset investors while ensuring the added advantage of reduced transaction fees. Recently, we’ve been experiencing a surge in gas fees on the Ethereum network. Thus, this feature of index funds is even becoming more attractive to several crypto enthusiasts.
In essence, an index fund is a portfolio created to track or match some elements of the financial market sector, like the S&P 500 index. Anytime particular assets rise or dip in value, the asset rebalances and goes back to the percentage allocation aimed for that asset.
This investment model lets investors create a passive portfolio management strategy and relieves them of the stress of managing a successful portfolio. One of the most significant advantages an index has to offer is diversification. Spreading your investments over several assets signifies that there is a lesser risk involved than investing in one.
What Is a Decentralized Index?
For a while now, index funds have been a worthwhile investment in the traditional markets. The same qualities that make them a profitable venture in the traditional market qualify them to be the same in Decentralized Finance as well.
Rather than trying to select a winner token — which is usually tricky to forecast in advance, you can purchase a basket of tokens, which were painstakingly chosen by index methodologists. This presents you with a higher possibility of achieving good returns. Even if a token performs poorly, several other tokens help you maintain the index price.
Perhaps, the most significant distinguishing factor between the traditional and DeFi indices is that rebalancing and re-weighting in the Decentralized indices is automated on-chain with smart contracts.
In the traditional financial space, you get to pay a management fee to managers who manually rebalance and reweighs the stocks held in, for instance, an S&P 500 index. However, all these happen automatically in the Decentralized Index. Besides, governance token holders may also decide on future directions, which may not be possible in the traditional space.
With that said, Index funds are beginning to gain traction in the Decentralized finance (DeFi) space, with multiple projects emerging in that regard. Each project is experimenting with various mechanics. However, the best, judging by various metrics, is still arguably Indexed Finance. Suppose you want to delve into this space of Index investing. Then, in that case, this article is for you as it will cover all you need to know about Index investing and the Indexed Finance project.
Meet Indexed Finance
Unarguably, this is one of the hottest in the DeFi space at the moment. Indexed Finance is a protocol that focuses on passive portfolio management. This signifies that the entire re-weighting and rebalancing of indices takes place automatically via on-chain processes. In this space, it is arguably one of the projects that offer these features in the most Decentralized approach.
You only need governance to vote on decisions like the market sector definitions, indices deployment, and endorsing new management plans. As mentioned before, this is one of the hottest around today. During the first month of its launch, DeFi5 skyrocketed by 450% and CC10 by over 250%. And today, evidently, its indices are the best performing in the space.