Index funds have long been pitched as a low-risk and inexpensive way to invest. Now they’re coming to the rollicking world of cryptocurrencies, but with plenty of caveats as well as expectations for eye-popping returns.
In a nod to the decentralized aspirations of crypto, the handful of funds offered—which go by names such as Index Coop, Indexed Finance, PieDAO, and BasketDAO—are run by DAOs, the decentralized autonomous organizations that are governed by software programs and user communities.
Over the past year, these community-run index funds have raised hundreds of millions. Launched about a year ago, Index Coop—likely the biggest—manages about $343.5 million for more than 26,000 users, said Simon Judd, head of business development. Synthetix, which offers a slew of non-index products as well as a decentralize finance, or DeFi-tracking index, has about $386 million in assets. Indexed Finance has nearly $11 million.
“I see this as a maturing of the overall crypto ecosystem,” said Bennett Adams, a New Yorker who said he invested about $50,000 into Index Coop. “The to-the-moon swings are fun, but that’s not a retirement strategy. What Index is building is going to work for a long-term hold.”
Index Coop governance has approved a new product!
Are you $GMI ?
The @banklessDAO DeFi Innovation Index captures the upside of DeFi upstarts on a rolling basis pic.twitter.com/n5xL6ZUxsu
—Index Coop (@indexcoop) December 18, 2021
The index DAOs are still relatively small, compared with around $2.2 billion invested in crypto index funds, according to a tally kept by James Seyffart at Bloomberg Intelligence.
The main attraction lies in turning index funds into tokens that people can trade, lend out and borrow to increase returns. Take Index Coop, which issues seven fund tokens, each focused on sectors such as DeFi or metaverse, and also lets people invest with leverage. Users can lend their tokens through DeFi projects such as Aave and earn returns. Or they can convert a fund token into its underlying tokens, such as converting DeFi Pulse Index token, or DPI, into tokens of Aave, Uniswap and Compound. The tokens trade on decentralized exchanges.
“Imagine being able to take a share of SPY (SPDR S&P 500 ETF) and redeem it for the underlying S&P 500 companies,” said Mike Taormina, who invests into Index Coop’s DeFi Pulse Index fund. Taormina worked at JPMorgan Chase & Co. before becoming one of five full-time contributors at Index Coop.
While only accredited investors can invest directly into many centralized crypto index funds, index DAOs are usually open to anyone. Much of a DAO’s financial activity is also registered on the blockchain—often, Ethereum—for anyone to see.
Another benefit comes from being able to impact the index DAO’s activities via related governance tokens. Index Coop, for instance, issues Index, which has been purchased by some large venture-capital investors. On Dec. 8, Sequoia Capital India invested $2.25 million, following in the footsteps of investors like Mike Novogratz’s Galaxy Digital. The token can not only be used for voting on Coop’s future products and strategic direction, but also on all of the projects it invests in. So an investor with Index tokens can have a say in future development of Aave or Compound, for instance.