It’s been a long time coming, but we finally have a decentralized broad-based US stock index token on the blockchain! Smart contracts that ensure enough ETH are in each vault secure the value of this ERC-20 token representing the US stock index (specifically this token tracks the SPY ETF in the USA).
What is a US stock Index?
A good, broad based, US stock index generally tracks a large value-weighted set of stocks that trade publicly the US. There are many great stock indexes in the US, including VTI, the Vanguard all-US index, the Russell 1000 of the top 1000 largest cap stocks in the US, or the S&P 500 Index (SPX, ES, SPY, ^GSPC, or INX) the top 500 stocks in the US. These serve as a good proxy for the health of the entire stock market overall.
Certainly, there are indexes that cover more investable assets in the world. The MSCI ACWI covered all countries and more market cap. US stock indexes largely misses categories that represent a large fraction of assets: real estate and bonds.
However, what makes the top 500 US stock index unique is that it is arguable the most liquid index in the world. Each of the underlying stocks are easy to trade because they are large. Moreover, the SPY serves as a coordination point for traders seeking liquidity.
Naturally, the US stock index should be brought over to the cyptocurrency blockchain as an ERC-20 token. This is in line with the wave of assets that are making it over from traditional finance to the blockchain.
Evolution of Crypto ERC-20 Tokens Linked to Specific Values
As a quick recap, at first there was just Bitcoin or Ethereum. These coins’ value could swing wildly, being determined independently by market supply and demand every day.
Crypto users wanted to create tokens that are more stable (stablecoins), tokens that track the value of some outside object. Users started by creating stablecoins that tracked the USD dollar, like USDT or USDC. USDT and USDC are ERC-20 tokens that are pegged to the value of a USD dollar by a company. Each company claims to hold actual dollars in their bank, and will redeem these dollars for the ERC-20 token.
The USDT and USDC were great at tracking the dollar, but with one issue. Bitcoin and Ethereum are decentralized, but USDT/USDC represents stakes in a central company. This central company could decide one day to censor you, taking away from the decentralized appeal of cryptocurrencies.
DAI solved that problem by making the a decentralized token that tracks the USD. How is that possible? The answer is by using Ethereum smart contracts. Users of DAI deposit ETH collateral to DAI. Each DAI is guaranteed by contract to be backed by more that enough ETH. Through smart contract magic, DAI is pegged to the dollar with no central authority to trust!
Enter the US Stock Index Token
A stablecoin like DAI is great for transacting at stable prices. However, DAI isn’t the best asset for long term investment. After all, the dollar will decrease in value with inflation. General holding any sort of cash equivalent offers poor risk to reward characteristics.
vSPY as a Crypto Broad US Stock Index Token
The vSPY token launched in November 2020, and you can buy the token right here on Uniswap.
vSPY not only to tracks the value of the raw SPY ETF, but also dividends. Eventually it will capture short interest and rebate rates you would get from holding the ETF. This is an important point for users who want to buy and hold US Stock indexes for the long term. If an ERC-20 token doesn’t capture dividends, it would provide substantially worse returns over time.
The vSPY token follows the ERC-20 standard, which means it transacts on the Ethereum network. It inherits the security features of that blockchain and smart contracts written on that blockchain.
Further, vSPY is decentralized. No company or person is holding SPY shares on your behalf and issuing the vSPY token. Instead, anyone can deposit ETH into a vault and create vSPY tokens. Open, verifiable, smart contract code secure the locked ETH, not any company. vSPY pegs to the SPY ETF using a liquidation process that any crypto community member can participate in.