Token Baskets: Automatic Crypto Investment Diversification

What Is Diversification in Investing?

The practice of portfolio diversification is a standard risk management practice in traditional asset markets. In theory, the less diversified a portfolio, the higher the risk of potential losses, and the more diversified a portfolio, the lower the risk. For example, if an investor holds a single asset and its value drops by 50%, there's no way to protect against the negative impact. However, if an investor holds multiple assets, their portfolio is more resilient against the downward price movement of any specific single asset. Thus, diversification helps to reduce risk and protect future returns. That’s why many investors use diversification strategies to build a portfolio that encompasses multiple asset classes or market segments instead of holding a single asset.

In the digital asset ecosystem, token basket protocols deliver these benefits to investors looking to implement a crypto diversification strategy in the most simplified manner possible.

What Is a Token Basket?

One of the key drivers for the remarkable growth of the wider decentralized finance (DeFi) ecosystem, token baskets provide a powerful tool for crypto portfolio diversification. Token baskets contain several cryptocurrencies bundled together into a single asset that is managed using smart contracts. The majority of token baskets available on the market thus far are built using Ethereum to leverage the platform’s advanced smart contract functionality. Instead of purchasing individual tokens to meticulously build and manage a balanced crypto portfolio, traders can invest in a crypto token basket to achieve diversification. By simplifying the crypto portfolio allocation process, token baskets encourage participation in the digital asset class and help new crypto investors manage risk.

Crypto Tokenization and Crypto Baskets

Most crypto basket protocols utilize a single token to represent each asset in the basket. Following this methodology, every time an investor purchases a token basket protocol’s index token, they’re actually purchasing a portion of the underlying basket proportionate to their investment. However, while most protocols utilize a single token, the deployment and structure of each token basket varies across platforms. Here, we’ll take a look at a number of the leading token basket protocols available on the market in 2021.

Blue Token (BLUE)

The Blue Token (BLUE) is one such tokenized crypto basket. The protocol uses funds from the sale of BLUE tokens to purchase each of the 14 cryptocurrencies held in its basket product. As such, the BLUE index token’s value directly correlates to the value of each basket component, which adheres to the following allocation:

• Bitcoin (BTC): 25%

• Ether (ETH): 25%

• Cardano (ADA): 10.1%

• Binance Coin (BNB): 7.2%

• Ripple (XRP): 5.8%

• Chainlink (LINK): 4.2%

• Polkadot (DOT): 3.9%

• Solana (SOL): 3.8%

• Stellar (XLM): 2.5%

• Litecoin (LTC): 2.5%

• Curve (CRV): 2.5%

• Algorand (ALGO): 2.5%

• PancakeSwap (CAKE): 2.5%

• Polygon (MATIC): 2.5%

Like other crypto token basket platforms, BLUE allows investors to hold a single token while diversifying their crypto holdings. While some crypto basket platforms are non-custodial, BLUE maintains custody of the tokens it generates, which means all participants share custodial costs, resulting in potential cost savings.

Set Protocol

Using the Set Protocol, users can generate, rebalance, and continuously manage a crypto portfolio of Ethereum-based ERC-20 tokens. This collateralized basket of tokens, known as a Set, is packaged using smart contracts and exchanged via a single token. The resulting token is also tradeable on cryptocurrency exchanges. To participate in the Set Protocol, users can invest in existing indices (Sets) or create their own without interacting with underlying tokens.

Bancor Smart Tokens

The Bancor protocol utilizes decentralized, trustless token index baskets in the form of Smart Tokens. On this protocol, token baskets that consist of two or more digital assets are called Smart Tokens. These Smart Tokens can hold multiple token reserves, each with an independent constant reserve ratio (CRR) setting. Smart Tokens can be purchased for any of their reserve tokens or liquidated in exchange for them on the Bancor platform.

sDeFi

A synthetic DeFi index token supported by the Synthetix protocol, sDeFi tracks a crypto basket of DeFi tokens using price feeds supplied by decentralized Chainlink oracles. As a result, sDeFi holders have exposure to a dozen different tokens, allowing them to more conveniently implement a crypto diversification strategy. In addition, the sDeFi token is exchangeable for other Synthetix-native assets on its Kwenta derivatives platform or the Synthetix Exchange. In contrast to many other protocols that support custom token baskets, sDeFi assets are governed via the Synthetix community, which votes on the sDeFi asset reserve allocation.

BasketCoin (BSKT)

Like other collateralized index tokens, the value of the BasketCoin token tracks underlying asset reserves. More specifically, the BasketCoin token basket consists of the following cryptocurrencies:

• ETH: 25%

• BTC: 25%

• SmartKey (SKEY): 10%

• DOT: 10%

• YF-DAI: 10%

• USD Coin (USDC): 10%

• BSKT: 10%

Each asset in the token basket is allocated to various platforms, providing revenue potential via the platform's unique buy-back process. In addition, 90% of protocol revenue is committed to the BasketCoin token burning, while the remaining 10% is allocated to project expenses.

Crypto Diversification Strategies and Token Baskets

Through the use of token basket platforms, investors can gain immediate exposure to an accessible crypto diversification strategy. For less experienced crypto investors, this dynamic streamlines the purchase of digital assets and reduces the need for extensive research, expert investment strategies, and active management of their crypto portfolio allocations.