Due to long-term attention to bankless-related information and articles, I recently discovered that they have launched a new product, namely the Bankless DeFi Innovation Index (GMI).
GMI is an index product designed to track blue-chip DeFi tokens, which include twelve growth-oriented DeFi tokens: Ribbon Finance, Alchemix, Tokemak, Tribe, Olympus DAO, Dopex, DYDX, Abracadabra Money, Perpetual Protocol, Maple Finance, and Reflexer Finance.
Most people are already familiar with the above projects, so I won't dwell on them too much. This article is more about introducing the concept of DeFi Index products.
In fact, there have been many DeFi Index products before, but they have always been relatively unknown. Due to the nature of index products, they are difficult to hype because they often require collateral or anchoring of assets during index construction, which means that index products have a basic price anchor from the beginning and are less prone to extreme price fluctuations.
DeFi Index is actually very similar to traditional ETFs and can be understood as a decentralized ETF. In traditional finance, the closest counterpart to DeFi Index is the exchange-traded fund (ETF), which tracks the performance of an index, industry, commodity, or specific asset.
With the popularity of cryptocurrencies and concepts like NFTs and the metaverse, more and more new audiences are being attracted. However, the barriers to entry in the industry have not decreased with its popularity. The choice and use of wallets, multi-chain operations and risks, and many other complex and unaccountable risk operations have become significant barriers for newcomers. Therefore, DeFi Index products are likely to experience a huge explosion as the industry grows.
Just like in traditional finance, there are many stock traders, but few professional traders. The majority of people still manage their finances through the purchase of funds, ETFs, REITs, and other means, rather than engaging in direct trading. Similarly, in the cryptocurrency or blockchain field, although there are no barriers to entry in terms of capital, there are significant requirements for the personal abilities of investors. Therefore, DeFi Index products may be the best investment choice for those who are not good at trading or on-chain operations.
Comparing ETFs with DeFi Index, although they have many similarities, they also have fundamental differences in some areas.
First, the cost of establishment. It is well known that the cost of launching an ETF in traditional finance is extremely high, especially for ETFs targeting cryptocurrencies, which face significant regulatory pressure even with sufficient funding.
On the other hand, DeFi Index can be quickly established and launched for trading on DEX. All of this is based on open-source smart contracts and controlled and commissioned through DAO protocols.
Second, the management method. Both active and passive management can be well supported on DEX. Even automated arbitrage strategies can be implemented. For example, behind the issuance of an Index, there is a need to collateralize actual cryptocurrency assets, which can lead to the creation of a lending market. The Index can track the price of collateral assets through oracles, and the collateral assets can earn lending income. In some high-performance, low-gas public chains, such as Solana, it is even possible to achieve automated quantitative trading of the Index.
Third, the derivative market. Benefiting from the "money Lego" nature of DeFi, the issuance of collateral assets for an Index will inevitably create a capital pool. This capital pool can be used for lending business, which is a very mature and popular business form in the DeFi field. Index Swap business can even be introduced, becoming a DEX that serves Index trading and relies on Solana's high performance to implement quantitative trading or arbitrage on the Index.
Fourth, DAO. As DeFi 2.0 matures, Index can be sold at a discount in exchange for liquidity, and the liquidity can be controlled through DAO. The entire DAO can receive liquidity fee income and allow the liquidity depth of the Index to continue growing.
Some friends may still have difficulty understanding how such a DeFi Index operates, so please follow my description to imagine such a product.
I have now issued an Index product called the Liuye PublicBlockChains Index (LPI). The purpose of this Index is to track five emerging public chain tokens, which include Solana, Terra, AVAX, Mina, and Cosmos. Therefore, when it was initially issued, I set the Index to include 0.1 SOL, 0.1 LUNA, 0.1 AVAX, 0.1 MINA, and 0.1 ATOM. Based on the feedback from oracles on market prices, the base value of this Index is $36.1, and users can mint 1 LPI by paying $36.1 through the protocol.
When the five public chains included in LPI experience a significant price increase, the price of LPI itself will also increase. If the trading price of LPI does not increase with the market, users can choose to repay by destroying 1 LPI to retrieve the corresponding amount of tokens (i.e., 0.1 SOL, 0.1 LUNA, 0.1 AVAX, 0.1 MINA, and 0.1 ATOM).
In this way, the value of LPI is secured through collateral, making it difficult for its value to deviate, and it can accurately track the corresponding underlying assets based on market prices. Once there is a value deviation, economic behavior will encourage users to participate in minting or repaying for arbitrage, allowing the price to re-anchor.
In conclusion, the emergence of DeFi Index products largely fills the gap of high learning barriers for newcomers. They only need to purchase suitable Index products to track most DeFi assets, eliminating the need for extensive project due diligence. A trusted project analyst can also become an Index manager in the emerging DeFi Index market and earn commissions from it.
The projects, opinions, explanations, and analyses mentioned in this article may be incorrect and are only for recording and sharing purposes. Feedback and corrections are welcome.
Remember, at no time do I provide investment advice, and I do not even recommend investing in cryptocurrencies. Sometimes, messages in the background may not be displayed, so you can add me on personal WeChat for communication. But please indicate the purpose.
Wiseman's Notes - Liuye Jinghong
Personal WeChat ID: liuyejinghong_