The meteoric rise of ETFs (exchange-traded funds) has had an unforeseen effect on the index markets all over the world. These ETFs often track popular market index heads such as the Nasdaq-100 and the S&P 500. Instead of putting so much time and effort into trying to play the markets often without success, investors have learned it’s better to invest in the entire market. This way, the investors are guaranteed a certain percentage of returns, which have been quite fair over the last decade, both in crypto and stocks.
The summer of 2020 saw the rise of DeFi. As it has continued to gather traction, so does the interest in passive cryptocurrency investment. Because market players have seen how effective and attractive DeFi indices are, the investment money is continuously flowing in. This year, several platforms and projects have been launched seeking to capitalize on the intense buzz that is DeFi. Some of the products launched, such as Synthetix’s DEFI or FTX DeFi perpetual contract, are derivative products that are largely based on their synthetic contracts. In a nutshell, their job is simply to track the prices of a certain class of assets without having to own the underlying tokens.
Because of the blockchain technology underlying most DeFi technologies, there is a possibility of creating a product very much identical to an ETF. Although these funds often own the basket of assets being monitored, it’s possible to monitor activity and redeem some shares if it warrants. These shares can be sold to members if the ETF is more expensive than the underlying assets being held.
Major DeFi products currently available
Today, we find that there are about three major DeFi products that fall into the ETF sector. These are the Power Index by PowerPool, indices by PieDAO, and the DeFi Pulse Index. The biggest difference between these platforms is mainly on how they weigh each token and the primary assets each one of them prefers to cater to. PieDAO and DeFi Pulse leverage market-capitalization as their preferred weighing mechanism, while PowerPool uses a fixed quota generated for each one of their tokens.
The PowerPool and PieDAO indices can further be modified using governance voting, which is done via the CVP and Dough, respectively. Although these two indices closely resemble conventional ETFs, PowerPool’s platform gives us hope that these indices will someday grow beyond what the regular market is used to.
Passive income in cryptocurrencies
There are several ways to earn passive income when dealing with crypto. These include:
Staking: This is one of the simplest ways to earn passively with crypto. This method involves getting paid for holding certain cryptocurrencies for some time. The investor is offered an ROI, which is more stable and doesn’t require investment in equipment, which could be quite pricey. Here, a lock-up period applies, meaning that your digital asset will be tied up to the exchange for a certain period.
Lightning nodes: Blockchain technology consists of two layers: the application and implementation layers. The lightning nodes fall into the implementation layer of this technology. Although there is no immediate return on investment here, the lightning node owner is paid in transaction fees. As the market grows, so does its need for lightning nodes. The more transactions these nodes handle, the more the owner will receive.
Repo or lending: Lending tokens to others is also a fully-fledged way of making some good money passively. Here, an individual with a sizable amount of tokens can prepare a platform using smart contracts, people can lend their coins and then be paid with a bit of interest. Depending on certain criteria, an investor can be able to set the parameters needed to qualify. By using these smart contracts, the system can differentiate the creditworthy from those who aren’t. When the loan matures, the amount paid back will be slightly more than was borrowed.