How to Invest in DeFi

Madison Sinclair

Apr 26 | 7 min read

How to Invest in DeFi

Decentralized finance (DeFi) is an emerging technology aimed at eliminating intermediaries from financial services through the use of public blockchains. As its use cases expand, understanding DeFi will be key to providing and engaging in forward-thinking financial services. Learn what, why, and how to invest in DeFi.

What is DeFi?

Why would someone want to invest in DeFi?

How can you go about investing in DeFi?

What are the steps to making DeFi investments?

What is DeFi?

DeFi is a rapidly growing industry that uses blockchain technology to remove third parties from financial transactions. It aims to create a more straightforward and efficient financial system by leveraging smart contracts, or pieces of code that run on blockchains, that can complete complex transactions without the need for an intermediary.

Traditional finance (TradFi), on the other hand, relies on a centralized approval authority like governments and banks, to approve financial transactions. DeFi applications, in contrast, use smart contracts on a blockchain (like Ethereum) to automatically execute transactions if certain conditions are met.

To gauge the size and success of DeFi applications, Total Value Locked (TVL) is used. TVL aggregates the overall value of all DeFi assets locked in a protocol, including staked assets and assets in liquidity pools. This means that the TVL of a project changes according to the changing dollar value of all of its assets, not just when users deposit or withdraw assets into the project. The deposits of many DeFi projects, like those of Index Coop, are in the project’s native token (in Index Coop’s case, $INDEX). Thus, as a project’s native token changes in value, the project’s TVL changes with it.

DeFi applications today represent 6% of the total market capitalization of crypto assets, and use cases are rapidly expanding. Eventually, DeFi may enable a decentralized alternative to every financial service you use today—lending/borrowing, asset management, trading, insurance, and more.

Why would someone want to invest in DeFi?

Those who invest in DeFi tend to believe in its potential to revolutionize the way financial services are rendered. If you are considering investing in DeFi should consider a number of its advantages:

Significant potential upside: According to Forbes, TVL in DeFi projects rose from $13 billion in early 2021 to its present value at over $200 billion in early 2022, meaning value has risen multiplied at a rate more than 15x in only one year. Given DeFi’s expanding use cases and proven ability to solve a number of problems inherent to traditional financial infrastructure, DeFi presents an enticing investment opportunity over the long-term.

Low cost: Since those engaging in financial transactions are not burdened with compensating intermediaries thanks to smart contracts, DeFi has a fundamentally lower cost structure than TradFi.

Two-sided markets: DeFi’s permissionless nature and peer-to-peer structure encourages new sources of supply to fund the financial market without the same barriers they would face entering TradFi.

Quick transactions: Because DeFi uses smart contracts to allow financial transactions to bypass intermediaries, they settle much faster than traditional financial transactions that would require intervention by a bank or government to settle.

Wide reach: DeFi reaches anyone with an internet connection, no account, identification, or approval required, making it far more accessible than TradFi.

Transparent: As DeFi employs smart contracts to carry out financial transactions, all transactions, data, and codes on the blockchain are publicly available. This increases trust among users as data can be aggregated and analyzed in a meaningful way, as opposed to TradFi where much is private or difficult to access.

Self-executing services: Once smart contracts are deployed to the blockchains they run on, they will continue to function without human curation, forever. This means that if you invest in a DeFi project of a company that goes under, the project will continue to run regardless of the status of the company that initially built it.

Highly composable: DeFi applications are referred to as “money legos,” as they can be stacked on top of each other and rearranged to allow for execution of increasingly complex transactions. This feature is one of DeFi’s most important value propositions, as it allows for quick innovation as companies compete by building on top of open-source, decentralized applications instead of having to recreate them from scratch.

How can you go about investing in DeFi?

Index Coop creates DeFi products that unlock prosperity for everyone. Indices are great options for beginners, as they allow you to diversify your DeFi portfolio without having to pick winners yourself or to pay transaction fees for each individual token listed within a single product. Here are five DeFi products to consider:

If you’re looking to get started in DeFi or just diversify your already existent portfolio, check out the DeFi Pulse Index (DPI). The Index Coop’s flagship product, DPI is a great intro to DeFi investing. It’s capitalization-weighted index that tracks the performance of decentralized financial assets across the market, and it aims to track DeFi projects that have significant usage and show a commitment to ongoing maintenance and development. Also good for beginners, DPI is available for trading on Gemini, a centralized exchange that allows you to purchase the product from fiat currency.

If you’re interested in taking your investments in DeFi to the next level, look no further than the Bankless DeFi Innovation Index (GMI). GMI provides passive exposure to cutting-edge DeFi applications through the implementation of a system to graduate tokens based on their inclusion in the DeFi Pulse Index (DPI), or length of inclusion in the index (18 months). The index includes early-stage DeFi projects which are not yet considered “blue chip,” attempting to offset the risk of exposure to DeFi upstarts by its broad composition of 12 tokens.

If you’ve heard Mark Zuckerberg discuss “the Metaverse” but you aren’t quite sure where to start, or you’re interested in gaining access to a variety of virtual happenings in the Metaverse, look into the Metaverse Index (MVI).The Metaverse Index (MVI) is designed to capture the trend of entertainment, social activity and business moving to take place in virtual economies, powered by NFTs and DeFi. A thematic index, it powers risk-adjusted returns through diversification of tokens across different areas of the Metaverse, each of which may react differently to the same event. While DeFi provides the infrastructure for financial transactions within the Metaverse, the Metaverse offers the environment for virtual economies, making the Metaverse an important part of the DeFi ecosystem.

If you’d rather your ETH do something rather than sit around idly in your wallet, consider the Interest Compounding ETH Index (icETH). icETH gives token holders amplified exposure to the staking yield on Ethereum accomplished through a leveraged liquid staking strategy. It retains spot exposure to ETH and amplifies staking returns up to 2x, creating yield of up to 10%. icETH embodies the “money legos” aspect of DeFi, as it is built on top of two existent protocols, Lido, a staking protocol, and Aave, a liquidity protocol.

If you want to expand your investments in DeFi into NFTs, look at the NFT Index (JPG). JPG provides broad exposure to blue-chip and premier NFT collections through a single liquid token. The underlying tokens in the index are drawn from fractional and liquidity vaults, curation DAOs, and currencies. Additionally, JPG holders have governance power over the token protocol, meaning holders can vote on which future collections to acquire.

If you’re looking to dive deeper into DeFi or you want a say in the future of Index Coop, check out $INDEX. Our native governance token, $INDEX gives holders voting access to Index Coop DAO. Voting occurs on a 1:1 token basis, meaning the more $INDEX you hold, the more say in our products, DAO, and metagovernance proposals across the web3 ecosystem you have.

What are the steps to making DeFi investments?

You don’t need to share your identity, make an account, or gain approval to invest in DeFi; anyone with an Internet connection and an Ethereum wallet can invest in DeFi today. There are two simple steps:

Create an Ethereum wallet. This wallet is a digital entity that will allow you to store crypto coins. Choose any wallet you like; a popular recommendation is MetaMask, the most widely supported wallet across the larger DeFi ecosystem. Argent and Coinbase Wallet are other options.

Purchase DeFi products, like governance tokens or DeFi-focused indices, on an exchange:

About Index Coop

Here at Index Coop, we create decentralized financial (DeFi) products that unlock prosperity for everyone. We build simple yet powerful index products to provide everyone with an internet connection access to a variety of crypto investment themes and make it simple, safe and affordable to invest in decentralized finance. Index investing is widely regarded as one of the easiest ways to diversify a portfolio, gain exposure to a diversified basket of assets, and experience competitive performance with the broader market. And since index products are a bundle of assets wrapped into a single ERC-20 token, you can invest in a number of the largest asset class via a single transaction, and save on cost compared to buying each of the constituents separately plus you don’t pay transaction fees to rebalance and optimize the portfolio.

Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.

Sign up for our newsletter

Information is for educational and illustrative purposes only. The Index Cooperative is not engaged in the business of the offer, sale or trading of securities and does not provide legal, tax, or investment advice. Cryptocurrencies and other digital assets are speculative and involve a substantial degree of risk, including the risk of complete loss. There can be no assurance that any cryptocurrency, token, coin, or other crypto asset will be viable, liquid, or solvent.No Index Cooperative communication is intended to imply that any digital assets are low-risk or risk-free. The Index Cooperative works hard to provide accurate information on this website, but cannot guarantee all content is correct, complete, or updated.

How to Invest in DeFi

Madison Sinclair