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Aug 27
2020
Riding The Trend With Binance’s DeFi Composite Index Futures

The Decentralized Finance (DeFi) sector has grown exponentially in the last few months, with more than $6 billion in assets locked in the DeFi ecosystem. We have seen tremendous interest in DeFi-related cryptocurrencies on Binance, as volumes continue to grow by the day. 

To cater to this booming demand, Binance has recently announced the addition of DeFi Composite Index Futures which is a tradable asset under the USDT-margined perpetual futures product line. The DeFi Index Futures is Binance’s first composite index product, allowing you to track and participate in the fast-growing DeFi market.

What is DeFi Composite Index?

In traditional markets, an index is often used to track the performance of a group of assets. Indexes typically measure the performance of a group of securities intended to replicate a certain segment of the market.

Binance’s USDT-denominated DeFi Index Futures is designed to track the overall performance of Decentralized Finance (DeFi) related cryptocurrencies listed on the Binance exchange. The DeFi index is calculated by a weighted average price of its components. At launch, the index covers ten DeFi-related cryptocurrencies with market capitalizations ranging from $150 million to $6.5 billion.

The index is built using a weighted average methodology, which considers variations reflecting conditions across market capitalization and volume.

What are its constituents?

The index comprises of the following DeFi protocols:

  1. BAND, Band Protocol

  2. COMP, Compound

  3. KAVA, Kava.io

  4. KNC, Kyber Network

  5. LEND, Aave

  6. LINK, Chainlink

  7. MKR, Maker

  8. SNX, Synthetic Network Token

  9. SXP, Swipe

  10. ZRX, 0x

Methodology

The USDT DeFi Index is built upon a weighted average methodology that takes into account various factors of varying degrees of importance. In calculating the weighted average, the square root value of each factor is taken into account for the final weightage value.

Weightage is calculated as:

Volume represents the constituent’s trading volume of the respective Binance USDT perpetual market between rebalances. 

Market cap refers to the market capitalization of respective constituents at rebalance time, all metrics are measured with the indices denomination.

The initial value of the DeFi index is set to 1000.

Weightage of components as of 26 August 2020:

As each component is weighted based on market capitalization and volume, regular rebalancing is needed to ensure that the index is proportionate. The index’s composite of tokens and their weighted averages are rebalanced regularly every Thursday at 7:00 AM UTC, using data from CoinMarketCap to reflect prevailing market conditions including market capitalization and transacted volume. This ensures that the index consistently reflects the underlying assets’ market performance.

More information can be found on FAQs and guides.

With the index, you can now capture trends in the DeFi sector and are similar to how conventional index futures are designed.

Binance will perform special adjustments when one or several components face drastic changes (e.g. delist or no organic volume). In these situations, Binance will adjust through either of the following procedures:

  • Exclude and recalculate the weight 

  • Exclude and fill up with constituents from an alternate list, and recalculate weight.

Adjustments will also be necessary in the event of a Hard Fork, Airdrop or Mapping, the following steps will be considered to make the appropriate changes: 

  • No adjustment needed for a soft fork or hard fork which does not generate new coins

  • For components hard fork/airdrop with new coins, the new coins should be included in indices with the weight of its original component and excluded on the next regular rebalance if sample selection criteria are not met.

  • Airdrop/mapping with components coins replaced by new coins, especially for split/reverse split occasions, the components should be replaced by the new coins with weight-adjusted according to the split ratio.

Contract specifications

Binance Futures contracts are perpetual. In general, perpetual contracts offer unique features:

  • No expiration date: Traders can hold positions without an expiry date and do not need to keep track of various delivery months, unlike traditional futures contracts. 

  • Funding rate: Every eight hours, funding rates are paid either to the long or the short based on differences with the spot right. It prevents lasting divergence in the price of the index and perpetual contract markets.

  • Settlement in USDT: Contracts are denominated and settled in USDT. Hence, it provides ease for new users to participate in these markets.

Why trade the USDT DeFi Index?

Since Q2 2020, the Decentralized Finance (DeFi) sector has been one of the key drivers of growth in the cryptocurrency industry. This interesting and exciting segment of cryptocurrencies aims to make financial services permissionless, decentralized, and peer-to-peer.

Many experts believe that the market will continue its upwards trajectory. With the addition of the DeFi index, you can now participate in the trend and develop more trading opportunities.

The USDT-denominated DeFi Index provides a broad sector benchmark to support:

  • Asset allocation: You can now balance risk and reward by apportioning your portfolio's assets to capture the full spectrum of investment opportunities in the DeFi sector.

  • Performance measurement: The benchmark will be available for more targeted investment mandates, for instance, a performance comparison between DeFi vs. other cryptocurrencies.

  • Hedging or Diversification: You can efficiently manage risk by hedging with the USDT DeFi perpetual contract. For example, long-term investors in DeFi tokens can use the index as a short hedge to reduce price volatility. Additionally, you can diversify by allocating capital across a range of DeFi tokens rather than concentrating them into one. It is also much cheaper and more efficient to go long in the DeFi index than to replicate the index by purchasing every token.

  • Broaden exposure: Don’t miss out on gains by only investing in one DeFi project. The index widens your exposure and, at the same time, limits risk as you can now participate in the growth of the overall sector rather than a single DeFi project. 

  • Short-term and momentum trading: DeFi is a fast-growing market that may present ample trading opportunities for short-term traders. You can now capture short-term trends, enabling you to be flexible and reactive to changing market conditions. With leverage available, you can magnify relatively small price movements to potentially create profits that justify your time and effort. As such, day-trading for small profits can add up and generate substantial profits to offset the losses in your long-term portfolio.

Getting started with DeFi

One of the biggest reasons why DeFi investors should consider Binance’s DeFi index is the capital efficiency that it offers. With futures contracts, you can hedge the exposure of your DeFi portfolio with only a fraction of its cost. 

By hedging, you need not compromise your DeFi holdings or liquidate them at an unfavorable price. Thus, hedging is a better option than simply waiting out for price recovery and doing nothing.

While the futures market is growing rapidly, it’s important to understand that not all derivatives are created equal. 

This spans from the functions of each derivative that are being offered, to how they are settled, to the amount of leverage available when taking a position. 

Doing your own research and understanding the products you trade is crucial before diving into crypto-derivatives.