S&P Dow Jones Indices has partnered with Centrifuge, a blockchain infrastructure provider to bring the S&P 500 Index onchain in anticipation of more funds being tokenized and the digital era of capital markets.

The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and is central to institutional portfolios according to a report last year from S&P Dow Jones Indices and Centrifuge. The report said it is the most widely tracked index globally, representing approximately 80% of U.S market capitalization and over half of the investable global equity market capitalization. Approximately $20 trillion in assets are benchmarked to the S&P 500 and there is  $273 trillion in one-year index-equivalent trading volume linked to S&P 500 products.

“As a result, there is potential for tokenized indices to reshape investment strategies,” added the report. “This initiative represents the first instance where S&P DJI has licensed a decentralized infrastructure provider, establishing the canonical ‘onchain’ version of the S&P 500.”

Stephanie Rowton, senior director, U.S. equities at S&P Dow Jones Indices, told Markets Media that it is extremely important that the onchain index is governed in the same way as the standard S&P 500 index.

“It has the same methodology, committee and oversight but with new rails and distribution,” she added. “We want to meet our clients where they are going to be.”

Proof of index

Centrifuge’s proof-of-index infrastructure makes the S&P 500 available in a format that is verifiable, programmable and trusted.

Rowton explained that S&P Dow Jones Indices generates a cryptographic fingerprint every day based on its official index composition files, which is published onchain. Any asset manager tracking the index can generate their own fingerprint from their portfolio. The two fingerprints must match to verify that the fund is replicating the S&P 500.

She added: “What’s really exciting is that funds can do this without revealing their holdings, so it is real-time verification without disclosure.”

Jeroen Offerijns, chief technology officer at Centrifuge Labs told Markets Media that this is an example of blockchain technology being able to offer additional business value. The onchain index allows additional trust, transparency and verification while meeting the compliance requirements of an index provider like S&P Dow Jones Indices and of asset managers.

Growth prospects

Rowton said both firms are eager to eventually launch more onchain indices. Putting an index onchain makes it a time-stamped, auditable and programmable input to a wide range of products and strategies.

An onchain index can serve as a time-stamped, auditable and programmable input to a range of products and strategies, such as ETFs, structured products, derivatives and decentralized finance (DeFi) applications.

“You can create additional programmability such as automated portfolios or automated investment strategies based on the data,” added Offerijns.

Smart contracts can be used to automate functions, such as rebalancing checks or performance fee eligibility, based on real-time index compliance,

Tokenized equities have already been issued in different forms and share trading may eventually move onchain, allowing 24/7 markets.

Offerijns argued that the proof-of-index framework is an important, but not the only, enabler for onchain equities.

He added that institutions are in the exploratory phase but he expects demand for the onchain index to grow as regulation changes and more pilots move into production.

“We are educating the market and the next stage is curating new products,” Offerijns said. “We are having a lot of conversations, and I expect some interesting products to launch in the next few months.”