The Case for a Decentralized Index Fund

The First Index Investment Trust was introduced by Jack Bogle and The Vanguard Group in 1975.

At the time, it was heavily derided by competitors as being "un-American" and the fund itself was seen as "Bogle's folly" ¹. In the five decades since, we now know that passive, low-cost, broad-based index funds have been the greatest equalizer of wealth in America, consistently beating the most sophisticated active investors, year over year . All regular people had to do to outperform them was to buy the market via an ETF and do nothing (opens in a new tab). The AUM of global ETFs have reached $9.6 trillion in 2022 ².

Last week, the SEC begrudgingly approved 11 Bitcoin ETFs in the U.S. Brian Armstrong of Coinbase believes that this sets the stage for an eventual crypto market index ETF, which will bring passive, low-cost, broad-based investment vehicles in crypto to the masses. All of this is wonderful.

So, why the need for a decentralized index fund?

Permissionless, transparent, and censorship resistant technology

The index fund is fundamentally a technology. It's a piece of technology that combines creation, redemption, and rebalancing to efficiently track the index price by holding its underlying constituents as closely as possible. Even if you believe that crypto market index ETFs are coming, as I do, it may be years before U.S. persons are allowed access to this piece of technology. Then consider how many more years it may take before this piece of technology is allowed globally. And it's worth thinking about what might happen if they ever reverse their decision on it.

I don't claim to be an expert on laws in various jurisdictions and their nuances. I believe fair regulation can create fair markets. However, I believe in access to technology as a human right. Not so long ago, we used to live in a world where encryption was outlawed and our rights to privacy technology were stripped. Protecting the freedom to access technology is an ideal we must uphold.

Transparent and autonomous code enables users to enter and exit an "index fund", while having access to every bit of the internal logic that enables it. It closely resembles what people know as index funds, hence it is one. However, you aren't giving money to a manager to invest on your behalf. You're depositing money in an autonomous network you can inspect ³.

The case for a decentralized index fund is the same case for that of Bitcoin. A piece of technology with powerful use cases, with even stronger attributes: permissionless, transparent, and censorship resistant.