In the previous article we talked about how to keep your funds safe by securing them within the DeFi ecosystem. In this new chapter, we will dive into two tough aspects of managing a portfolio in DeFi: diversification and automation.
These two aspects are crucial for a good investment direction, since they give you the right control over the risk you want to take and the investment time frame that you have in mind when you start.
Using a CEX or your bank, it is easy to achieve these two goals: there are financial instruments like ETFs at the bank, or trading bots on CEXs, that help you to get these results. But of course, as we described in the previous article, the problem is that they own your money.
So, is there a financial tool that automates your investments and diversifies them, while keeping your money under your control by leveraging the benefits of self-custody?
The answer is yes: it is called a Decentralized Token Folio (DTF).
What is a DTF
A Decentralized Token Folio (DTF) is a tokenized portfolio:
One token that represents a basket of other on-chain assets.
Instead of buying and managing many tokens individually, you buy a single DTF token. This token provides exposure to an underlying index or strategy within smart contracts.
You can think of it as the on-chain cousin of an ETF in traditional finance: an index fund wrapped into a single liquid instrument, but governed by code and (often) DAOs rather than banks or brokers.
Why DTFs exist: portfolio building is hard
Maintaining a diversified crypto portfolio manually is difficult:
- You must pick which tokens to include
- Choose weights (e.g., 40% BTC, 30% ETH, etc.)
- Execute many trades
- Design an investment strategy
- Periodically rebalance based on it
- Pay gas fees and trading fees every time
Most people focus on a few tokens or give up on rebalancing.
DTFs automate this. A DTF is an on-chain index with:
- Defined set of assets
- Mint/redeem logic for users
- Investment strategy rules
A simple definition
In the Reserve ecosystem, which popularized the term, a DTF is described as a generic name for any on-chain asset-backed index: a portfolio represented by a token and governed by smart contracts.
In a nutshell:
A DTF (Decentralized Token Folio) is a tokenized index on-chain:
A single token backed by a portfolio of assets in a smart contract, with transparent rules for composition and rebalancing.
Typical features of a DTF:
- On-chain – creation, trading, rebalancing and reporting all happen on a blockchain.
- Asset-backed – the DTF token is backed by real assets.
- Tokenized – the index shares that you buy and sell are liquid and can be transferred and split into smaller units.
- Permissionless – in many systems, anyone can mint/redeem, and often anyone can create new DTFs subject to protocol rules.
- Transparent – you can inspect on-chain what’s inside at any time, not just from quarterly PDFs; this is often called on-chain transparency.
How a DTF works under the hood
Implementations differ by protocol, but the core flow is similar.
1. Designing the folio
The creator defines:
- Asset ecosystem (e.g., top 20 crypto by market cap; DeFi blue chips; AI tokens; stablecoins only)
- Weights (market-cap weighted, equal-weighted, custom model, etc.)
- Rebalancing rules (time-based, deviation-based, rule-based)
- Fee model (management fee, mint/redeem fees, performance fees if any)
These rules are encoded in one or more smart contracts.
2. Asset vault and price
The DTF smart contract holds the underlying assets in a vault. The price of the DTF is:
total value of all underlying assets (NAV) / number of DTF tokens in circulation
All asset balances and total supply are visible on-chain, so NAV can always be audited and contributes to on-chain transparency.
3. Minting: entering the DTF
When a user wants to buy into the folio:
- They send supported assets (often a stablecoin or one of the underlying tokens) to the DTF contract
- The contract swaps/allocates them to match the target portfolio weights
- The contract mints new DTF tokens and sends them to the user
The user deposits value into the shared vault and receives a proportional share of the basket of assets.
4. Redeeming: exiting the DTF
When a user wants to exit:
- They send DTF tokens back to the contract
- The contract burns those tokens
- The user receives underlying assets (sometimes a single asset, sometimes a pro-rata basket, depending on the design)
This keeps the token supply and the underlying pool in sync.
5. Rebalancing
Over time:
- Some assets outperform, others underperform
- Weights drift away from the target
Rebalancing logic, automated or triggered by set conditions, moves the portfolio back to the target allocation, for example, by:
- Selling part of the overweight assets
- Buying more of the underweight assets
The DTF smart contracts typically use on-chain DEX liquidity and price oracles to execute these changes.
DTFs vs ETFs vs “do it yourself.”
Conceptually:
- ETF is an index (or strategy) packaged as a security and traded on a regulated exchange
- DTF is an index (or strategy) packaged as a token and traded on-chain
Compared with buying assets one by one:
- DTF is simpler – few trades, one position to monitor
- Systematic – rebalancing is rule-based and transparent
- Composable – you can plug the DTF token into lending markets, liquidity pools, structured products, and more (typically in DeFi).
Main types of DTFs
“DTF” is an umbrella term. In practice, a few recurring patterns appear.
1. Index DTFs (market exposure)
These aim to track a transparent index, such as:
- top N cryptocurrencies by market cap
- sector indices (DeFi, L1, L2, RWA, stablecoins, etc.)
Example: CMC20, built by CoinMarketCap and Reserve on BNB Chain, gives market-cap-weighted exposure to the top 20 cryptocurrencies via a single token.
2. Yield DTFs (yield strategies)
Instead of just holding spot tokens, these allocate capital to yield-generating protocols and wrap the strategy into a DTF.
Example: USD3 on Reserve is a USD-denominated DTF that spreads funds across multiple DeFi lending protocols to generate yield while keeping a dollar-linked profile.
3. Thematic or narrative DTFs
These focus on a particular theme:
- assets on a specific chain (e.g., Base, Solana)
- narratives such as AI, RWA, memecoins, stablecoins, etc.
Example: the Alpha Base Index (ABX) is documented as a DTF on the Reserve Index Protocol aggregating projects in the Base ecosystem.
Why users care: practical benefits
From a user’s perspective, DTFs aim to solve several problems.
1. Instant diversification
One token = exposure to many assets.
This reduces single-asset risk compared to holding one or two coins.
2. Operational simplicity
Instead of:
- selecting lots of tokens
- tracking them daily
- rebalancing manually
You hold a single DTF and let smart contracts implement the strategy.
3. Transparency and verifiability
Because everything is on-chain:
- You can see exactly what backs the DTF at any moment
- You can verify rebalancing transactions and fee flows directly on the ledger
All of this is part of the on-chain transparency of the protocol.
4. Self-custody and composability
DTFs are usually standard tokens in your wallet:
- You keep custody (within the usual limits and risks of smart contracts and wallets)
- You can use DTF tokens in other DeFi protocols, as collateral, or combine them in structured strategies
In many designs, the DTF behaves like an index token.
Risks and trade-offs
DTFs are not risk-free. Key points:
-
Market and sector risk
A DTF that tracks a volatile sector will be volatile. If the underlying assets fall, the DTF falls. Diversification helps but does not eliminate market risk. -
Smart contract and oracle risk
Bugs or exploits in the DTF contracts, the DEXs they utilize, or the price oracles they rely on can result in partial or total loss. -
Liquidity risk
If the DTF or its underlying assets have thin liquidity, large mints/redeems or trades can face high slippage. -
Governance and methodology risk
Some DTFs are governed by DAOs or committees that can change composition, weights, or fees. Poor governance or low participation can lead to indices that drift away from their stated goals. -
Fee structure
DTFs may charge a management fee and/or minting and redemption fees. For some users, holding a small set of underlying tokens directly can be cheaper, depending on strategy and time horizon.
This article is for educational purposes only and does not constitute investment advice. Anyone considering a DTF should read the protocol documentation, audit reports, and risk disclosures, and carefully evaluate their own situation.
Where Reactive Index fits
Reactive Index is a protocol on the Sui blockchain for creating non-custodial tokenized indexed folios. It gives users a transparent, self-custodial way to get diversified exposure to crypto assets through on-chain indices.
- Creators define an index (assets, weights, rules)
- Reactive Index smart contracts manage the vault, mint/burn logic, and rebalancing
- Users interact with the resulting index tokens directly from their wallets
Conceptually, these index tokens belong to the same family as DTFs described above.
The focus in Reactive Index is on:
- Full on-chain transparency of holdings and rebalancing
- Non-custodial design
- Deep integration with the Sui ecosystem and its performance characteristics
In summary
- A DTF (Decentralized Token Folio) is an on-chain, asset-backed index wrapped into a single token that often behaves like an index token.
- It aims to make diversified, rules-based exposure to crypto as simple as holding one asset.
- Under the hood, DTFs rely on smart contracts for mint/redeem, rebalancing, and transparency.
- They offer benefits in diversification, simplicity, and composability, but come with meaningful market, smart-contract, and governance risks.
- Protocols like Reactive Index are part of this new generation of on-chain index infrastructure, bringing ETF-style logic directly into DeFi with self-custody and programmability at the core.