An overview of Set Protocol and TokenSets
Created in November of 2017, Set Protocol is an emerging DeFi platform built on Ethereum that creates and manages baskets of tokenized assets.
“Sets allow users to group together different tokens and synthesize them into a single higher-order token that represents its underlying parts. The reverse process, redemption, allows users to split a Set back into its underlying parts.”
For those unfamiliar with asset management tools, platforms like Set Protocol can be used to construct and exchange complex financial instruments such as market indices, index funds, or ETFs.
As it relates to the average trader, think of Set Protocol as a tool to automate algorithmic trading strategies by buying a single ERC20 token.
In March of 2018, Set Labs raised a $2M seed round led by David Sacks’ Craft Ventures with participation from Vy Capital, DFJ, Kindred Ventures, Haystack Ventures and Social Capital amongst other venture capital firms and angel investors. Shortly thereafter, their beta was released on the Ethereum main-net where it lives today.
Since their public release in May of 2019, the San Francisco-based company has been hard at work, regularly adding new set types and all-star employees to their roster. Most recently, Set Protocol was added to DeFi Pulse, a leading tracker for the top projects in the DeFi ecosystem at large.
According to DeFi Pulse, Set Protocol has already garnered over $2.2M in total value locked (TVL). Moreover, in the past week alone, the protocol has doubled in TVL as existing TokenSets continue to prove their value.
Unlike all of the projects previously covered on Token Tuesdays, Set Protocol does not currently utilize an overarching token for work on the network. Instead, each trading strategy is represented as unique ERC20 tokens (called Sets) that are fully collateralized by the underlying assets of a particular portfolio. Each Set is weighed with respect to the percentages coded in the creation of the smart contract.
As it stands today, most TokenSets support a handful of digital assets including Ether (in the form of wrapped ether or WETH), US Dollar Coin (USDC), Dai (DAI), and wrapped Bitcoin (WBTC). We can expect that as the protocol continues to mature, the core team will support other digital assets in the near future.
While this process may sound complex from a high level, rest assured that all you need to get started is ether (ETH) and a web 3.0 wallet, like Metamask. When purchasing a new Set, the protocol automatically converts your ETH including all wrapping, conversions, and rebalancing, meaning you get all the advantages of complex trading strategies without having to worry about actively managing your portfolio. The platform makes it very easy to quickly “buy” or “sell” new Sets in a few clicks.
Sets are held in your own wallet, and since they are ERC20 tokens, investors can move them to any other wallet that supports ERC20 tokens. Each Set is fully collateralized by the underlying tokens held in the Set Protocol Vault contract. Sets are inherently non-custodial, meaning the Set Labs team does not have access to your funds and if you lose access to the wallet that holds your Set(s), Set Labs will not be able to retrieve it.
For a Set to rebalance, there must be price changes in the Set’s token components as well as the passing of a predefined window of time. When the Set rebalances, a modified dutch auction begins where traders can submit bids to swap new components for old components. The price becomes more favorable for traders as the auction goes on, ensuring that the rebalancing reaches completion. Dutch auctions minimize the amount of slippage occurred during rebalances, especially during high volume transactions where order books are thin on decentralized exchanges (DEXs), such as Kyber.
Participating in the rebalance auctions is currently open to any interested participants. If you’re interested in supplying liquidity and participating in the rebalancing auctions, feel free to contact the Set Labs team at firstname.lastname@example.org
At the time of writing, Set Protocol has a list of three different types of Sets:
Sets that aim to capitalize on the price trend of a target digital asset using popular technical trading indicators such as moving averages. These sets automatically rebalance into a stable asset on signals confirming bearish trends and into the target asset on signals confirming bullish trends.
ETH 12 Day EMA Crossover
ETH 20 Day Moving Average Crossover
ETH 50 Day Moving Average Crossover
Sets that are intended for neutral or bearish markets. This strategy outperforms the benchmark asset in bearish markets but underperforms in bullish markets. The range bound strategy automates buying when prices go down and selling when prices go up to capture local maxima and minima.
ETH Range-bound (Minimum, Low, or High Volatility)
BTC Range-bound (Minimum, Low or High Volatility)
Buy & Hold Sets
Sets designed for users who are long on digital assets as a whole, but want to diversify their risk over multiple tokens. This strategy automatically rebalances the underlying crypto to maintain a fixed ratio over time. Utilize these Sets to protect yourself from overexposure to a single token if you believe in the long term outlook of digital assets.
BTC ETH Equal Weight
BTC ETH 75 | 25 Weight
ETH BTC 75 | 25 Weight
As illustrated in a number of various Set introduction articles, Sets have been known to historically outperform the market. This means that if you were to have bought virtually any Set since the public launch in May, you would have accumulated more digital assets today than you had at the time of purchase.
At the time of writing, many of the trading strategies can be relatively tough to digest for the average individual. As such, it can be difficult to know which Set makes the most sense to purchase at any given time. Furthermore, there are a number of competitors including MelonPort that are looking to accomplish similar goals in a slightly more centralized fashion.
Seeing as Set Protocol is entirely reliant on the Ethereum network to function, network fees can be quite high during times of congestion. While this is more so a problem for Ethereum than Set Protocol, it’s worth noting that scaling is going to play a crucial role in the long-term viability of the project at large.
Lastly, the list of existing Sets are largely limited to Bitcoin, Ether and stablecoins. As such, the upside from utilizing TokenSets is likely to be smaller than what many digital assets traders have come to expect with the “10x” mindset. Rest assured that with TokenSets, while the chance of increasing your holdings by orders of magnitude is slim, the chance that your portfolio will generally outperform the market is significantly higher, assuming you’ve purchased the correct set(s).
As a passive or unsophisticated trader, we believe that leveraging TokenSets is a fantastic way to increase your chances of accumulating more ETH in stagnant or bear markets. Rather than having to rely on researching the next new altcoin and monitoring different limit and stop orders on secondary exchanges, Sets provide an interesting alternative to outperform the market without any added stress.
Set Protocol currently does not charge any fees for buying and selling new Sets. Seeing as we expect this to change in the near future, now is a great time to test out the platform when your only fees are the transaction costs to use the Ethereum network.
In the near future, we expect Set Protocol to open up the ability for anyone to create a unique Set, drastically increasing the competitive nature that rises from sophisticated trading. In short, we believe that this is just the beginning for Set Protocol. With future Set creators likely to be compensated when their strategies are mimicked or purchased, we see a vibrant ecosystem emerging from the Set Protocol in the not-so-distant future.
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Written By: Cooper Turley & Lucas Campbell