🌐Index Funds

Index Funds Overview

Crypto Index funds track the performance of a specific cryptocurrency index such as Ethereum ecosystem tokens or other narratives. These funds aim to provide investors with exposure to a diversified portfolio of cryptocurrencies, allowing them to gain broad market exposure rather than investing in individual digital assets.

Here's are how crypto index funds work and their benefits:

  1. Diversification: Crypto index funds are designed to represent a broad section of the cryptocurrency market. They include a mix of various cryptocurrencies based on a predefined index or criteria.

  2. Passive Management: Most crypto index funds follow a passive investment strategy. Rather than actively selecting and managing individual assets, they replicate the performance of a specific index. This approach reduces the need for constant buying and selling of assets, making them more cost-effective.

  3. Index Criteria: The composition of a crypto index fund depends on the criteria set by the index it tracks. For example, an index might include the largest cryptocurrencies by market capitalization, a specific sector of the crypto market, or assets with certain characteristics.

  4. Market Capitalization Weighting: Many crypto index funds use a market capitalization-weighted approach, meaning that the weight of each cryptocurrency in the index is determined by its market value. This gives higher representation to larger cryptocurrencies.

  5. Ease of Access: Crypto index funds are often traded on traditional stock exchanges, making them easily accessible to mainstream investors. Investors can buy and sell shares of the index fund through their brokerage accounts.

  6. Risk Mitigation: By diversifying across multiple cryptocurrencies, index funds aim to spread risk and reduce the impact of poor performance by a single asset on the overall portfolio.

How Index Funds Work Inside of Cadence Protocol

By enabling stakers to contribute various assets to a liquidity pool, Cadence can provide an index token asset that tracks and performs based on the assets contained in the index. This unlocks a multitude of benefits for Users such as the ones mentioned above. Additionally, the ability to create these index funds creates deeper liquidity, higher incentives for stakers, and greater token offerings.

These funds will operate similar to how the CLP Pool works. For context on CLP and the pricing mechanism, CLP is an index comprised of various assets that are utilized for trading on leverage and swaps. The token can be created by minting it with any index asset and then redeemed for any index asset by burning it. The minting and redemption price is calculated based on the total value of assets contained in the index, including any realized profits and losses from open positions, divided by the current supply of CLP tokens.

For funds separate of CLP, Users will be able to add liquidity earn additional fee revenue from the trading of those assets on Cadence Protocol.

Additional Index Funds on Cadence

Cadence's ability to create new indexes of various assets spans past just traditional crypto assets. Cadence will provide index offerings including those of various risk levels through tranches to cater to both the conservative investors and Degen traders. Tranches are index funds split up by risk or other characteristics in order to offer different investors more options.

Additionally, in the near future, Cadence will offer Indexes of:

  • Traditional Crypto Assets such as BTC, ETH, etc.

  • Ecosystems to capture the overall movement within a network or narrative such as Ethereum, L2s, Cosmos, DeFi, AI, etc.

  • Higher-Risk such as Meme Coin indexes and NFTs

  • Real World Assets to track assets such as Treasury Bills, Bonds, Stocks, Commodities, and Real Estate

With these Index Funds, Users can gain broad market exposure all while earning trading revenue. As a result, investors can typically benefit from the positive effects of diversification, such as increasing the expected return of the portfolio while minimizing the overall risk. This provides a straightforward way for investors to participate in the crypto market without the need to manage individual assets. This simplicity makes them accessible to a broader range of investors, including those with limited experience in the crypto space opening the space to all.

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