CRYPTO’S SECOND WAVE: A POINT BREAK?

Wednesday, February 3, 2021

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

With this headline in 2009, Satoshi kicked off a conversation about the nature of money. Because few people – ourselves included – have the mental fortitude to dig into money supply dynamics, the impact of crypto is distilled to one primary signal: BTC/USD.

The bailout of a few mortgage-punting banks sparked crypto’s first wave, which saw its peak in 2017, with Bitcoin reaching $20k before plummeting >50% in a matter of weeks. What many had hoped to be the perfect pipeline ended up being a scammer-filled wipeout.

The COVID-19 pandemic and government-led monetary interventions have acted as a point break revealing crypto’s second wave.

With Bitcoin topping 2017s all-time-highs decisively, we want to answer some key questions:

  1. Which narratives are helping crypto sustain its momentum?
  2. Which new players are riding this wave?
  3. How should investors be aiming to capture best conditions?

VIRAL NARRATIVES: WHAT DOES CRYPTO REPRESENT?

Q: “This bitcoin thing — is it a virus, a drug, or a religion?” 

A: “What’s the difference?” – Naval Ravikant

In digital labs, cypherpunks experimented until they finally merged money with their utopia of “code is law”. Ever since Bitcoin’s whitepaper release into the wild, crypto advocates and critics have been challenging one another, causing an ecosystem layered with narratives. 

Ironically, crypto’s first wave ended because there was little narrative consensus. Too many mutations – and forks – took place, culminating in the 2017 hype of there being a blockchain to tackle any and every problem.

Living through a pandemic is making us ask – what can we vaccinate against?

While crypto narratives spread like a virus, the narratives that are strongest in crypto’s second wave, and have caused a resurgence to new all time highs are the ones built around immunity:

  • Digital Gold (Bitcoin): Immunity against inflation, and fiat-debasement because of QE
  • Decentralized Finance (Ethereum): Immunity against asset seizures, trading halts (vis-a-vis Robinhood and wallstreetbets), etc.


If financial risk management is an exercise in choosing the best mediums for protection, then crypto is a drug that can give meaningful protection to inflation and give people upside to a new financial system.

So is crypto a virus, a drug, or a religion? What’s the difference…

NEW CARRIERS: MACRO FUND AND FINTECH SURFERS

“I am not a hard-money nor a crypto nut” – Paul Tudor Jones

Soundbytes by macro fund legends on CNBC, $310k BTC predictions by Citi, and the Financial Times ceding ground, are signs that the second wave of crypto is being amplified by a new group – “the institutions”.

On the buy-side of the institutional spectrum are macro funds like Paul Tudor Jones, long-only funds, and a handful of pioneering company treasuries. On the sell-side, fintech companies such as Paypal and Square offer crypto and invest in the ecosystem while the Goldmans and JPMs are busy assembling their 5-layer “Digital Assets” teams (emphasis on omission of “crypto”).

*Bitcoin buy-data from Casebitcoin.com

While the volumes bought by the “institutions” are still just a rounding error, the prospect of a 10x – or dare we say – 100x return on investment and future bragging rights, brings participants with legitimacy and best practices to a market infatuated by anon accounts and coins named after dog-memes.

CROWDED CRYPTO TRADES*

“If you want the ultimate, you’ve got to be willing to pay the ultimate price.” – Bodhi (Point Break)

Good trades, like good waves, get crowded. The mantra of don’t buy what you don’t understand is more important than ever. The big wave surfers of institutional crypto, ride the pipeline of Bitcoin’s momentum, hedge their initial investments with the right tools and reap the gains. The n00b bodyboarders see Bitcoin at $40k, think it’s “too expensive”, pile in Ripple, and get crushed. 

However, stupidity and recklessness are not beholden to retail investors. We’ve taken the liberty to simplify the consensus trades by investor type below:

BEWARE THE REEF OF REGULATORS

“(Bitcoin) is a highly speculative asset, which has conducted some funny business” – Christine Lagarde

While Lagarde and heads of state only seem to care about the “dangers” of crypto when the price goes parabolic, the actual deeds by regulators seem more pragmatic and show awareness of everything happening in the crypto space.

Nonetheless, the following topics are likely to fill the timesheets of regulators, lobbyists and crypto-lawyers busy for the foreseeable future:

  • Stablecoin regulation
  • KYC of non-custodial wallets
  • Limits on crypto derivatives trading
  • ICO-style crackdown on DeFi tokens
  • The elusive Bitcoin ETF (wen?)

With the influx of institutional players, the discussions could become very different from the ones in the previous cycle. Will regulators be the gnarly reef crushing the industry’s momentum, or will they eventually will push crypto’s second wave even higher?

Hang loose, HODLers, we’ll find out soon enough!

The TokenData Team

[addtoany]

Crypto M&A: 1H20 Update

Wednesday, August 19, 2020

What follows is a short summary of our research report about M&A activity in the cryptocurrency space. The full version can be downloaded for free:

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1H20 Deal Flow

42 acquisitions involving cryptocurrency and blockchain companies have taken place in the first half of 2020. At the start of the year, our industry survey had a majority of participants forecast a significant pick-up during 2020. While deal activity in Q1 was promising, we’ve seen a pull-back in Q2. Nonetheless, activity is on track to match 2019 despite the Covid-19 crisis. 

Click to enlarge

We estimate that deal value in the first half of 2020 has already matched 2019. The main reason for this increase is the re-emergence of large nine-figure transactions, mostly absent in 2019. The best example is the $300-400M acquisition of CoinMarketCap by Binance

Click to enlarge

Crypto Exchanges & Decentralized M&A

Exchanges and other trading-related companies were the most active strategic buyers in the first half of 2020.

Moreover, while we have not seen an actual case of “Decentralized M&A” yet, there have been deals involving protocols and ICO-funded teams.

Download the full report for an in-depth analysis on these topics.

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State of Crypto M&A: Update & Survey

Wednesday, March 4, 2020

Following up on our landmark M&A research piece for 2019 we provide a few insights on what’s been happening so far this year.

M&A slowdown

There has been a slowdown in Crypto M&A activity, contrasting our initial expectations and those of industry executives and investors. Nonetheless there have been a few notable deals:

Key industry executive M&A Survey

Over the past month we have collected the views of key industry executives and investors and have summarized the findings in a new report that you can download on our research portal:

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  • 2020 will be the year of M&A: A majority of all survey respondents expects 2020 M&A activity to outpace 2019. 
  • >75% of founders were involved in M&A discussions: We were surprised to see that such a large majority of founders were active on the M&A front – both as targets and buyers. However, most of these discussions didn’t end up in actual deal activity. This is from A-list entities, and we can only guess how much is going on at the long-tail of crypto startups. 
  • Deals “bounce” because of many reasons that are not about price: Whereas analysts will often focus on the price of a deal, founders have reportedly turned down offers due to non-economic reasons such as branding and the need to relocate their business. 
  • What data room? The “wild west” image of many crypto startups is visible in some deals not closing due to targets being unable to pass basic due diligence procedures. 
  • Will the Goldman Sachs of Crypto please stand up? Most deal activity and advisory is done in-house, or by executes of the large incumbent companies. When asked about influential dealmakers, survey respondents failed to mention an independent crypto M&A dealmaker.
  • When Decentralized M&A: 1 in 5 respondents thought that there will never be a case of Decentralized M&A (e.g. protocol takeover, independent of centralized party)

More in-depth updates will be available in the next edition of our State of Crypto M&A report which is due later this month. 

[addtoany]

Crypto ≠ risk pandemic vaccine

Wednesday, March 4, 2020

Choosing between selling n95 face masks in exchange for stablecoin and publishing data driven insights about crypto, we clearly prefer the latter. In this update we shed light on exchanges (Deribit and FTX) looking to set the benchmark for crypto vol trading and carve a niche ahead of the incumbents.

Wars, pandemics, and crypto volatility

If you’re active in crypto like us, you are inclined to think about financial markets, “black swan” events, and exponential events. Nassim Nicholas Taleb and Naval are our saviors. The first quarter of this new decade has given us plenty of geopolitical events that have caused many crypto pundits to salivate and want their cake and eat it.

  1. “Rooting for WW3 and BTC all-time-high” – The assassination of an Iranian general by the US in January and subsequent tension in geopolitics was paired with an uptick in price and plenty of “BTC is a safe haven” comments from your crypto twitter pundits.
  2. “Party like it’s 1999” –  Bitcoin crossed 10k in February while equities, tech stocks and risk-assets rallying in dot-com fashion. Familiar memes like “This time it’s different”, “Institutions are coming” and “This will be the last time Bitcoin will cross 10k” popped up everywhere. 
  3. “Want a slice of lime with it?” – While the crypto community has done an amazing job analyzing and debunking stories about corona/n-covid 19 most of us have been silent about Bitcoin prices falling in line with risk-on assets while gold and treasuries have rallied. Until mask manufacturers start accepting bitcoin as a means for priority delivery or all of Asia refuses to touch cash, crypto as pandemic-hedge seems far fetched to us. 

This market volatility has benefited the incumbent (spot) trading venues. Coinbase and Binance have seen volumes bounce up in the first two months of the year. However, the more impressive growth comes from the derivatives exchanges that focus on crypto volatility products.

2 phases of volatility trading

Taking a simple approach, we distinguish between two phases of crypto volatility trading:

  1. In phase 1 of crypto volatility trading, exchanges offer the ability to trade on margin and leverage for people who want to get even more exposure to the volatility of the underlying cryptocurrencies. Bitmex is the best example of leveraged crypto trading for retail punters and CME and Bakkt set the standard for “old fashioned” financial institutions wanting a little go at Bitcoin through cleared futures.
  2. In phase 2 of crypto volatility trading, exchanges offer instruments that allow volatility itself to be traded through options, straddles and volatility indexes. 

Two exchanges have emerged as the pioneers of phase 2 through significant growth and innovative product offerings: Deribit and FTX

Read the full article [addtoany]

Crypto M&A: Barbarians on the Blockchain

Sunday, November 24, 2019

Crypto M&A – A comprehensive review

Crypto M&A is alive and kicking. 350 acquisitions involving cryptocurrency and blockchain companies have taken place since 2013. However, beyond anecdotes, press releases and high level summaries, there haven’t been any thorough or forward-looking analyses, until now. 

What follows is a condensed version of a full research report that can be downloaded for free:

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Deal Activity 

350 acquisitions involving cryptocurrency and blockchain companies have taken place since 2013. M&A activity peaked in 2018 with more than 160 deals, and we estimate 90-100 deals for 2019.

Click to enlarge

M&A activity is volatile and seems positively correlated to crypto prices and industry sentiment. Monthly activity peaked in early 2018 as prices and industry attention soared. 

Click to enlarge

Deal Value

We estimate total deal value at $4 Billion since 2013, with $2.8B of M&A activity in 2018 and $700M in 2019. These figures might sound impressive, but are small compared to the total network valuation of cryptocurrency networks ($200B+). This makes sense given the early stage of this industry: most companies are less than 5 years old and a significant IPO seems years away.

Click to enlarge

A closer look at marquee transactions and interesting deals shows only one $100M+ transaction in 2019, versus five in 2018. However, 2019 has seen interesting acquisitions such as the acquisitions by Facebook for its Libra project, the consolidation in the crypto custody space (Coinbase-Xapo custody) and the first token merger.

Click to enlarge
Read the full article [addtoany]

Token Buybacks: Design or Despair?

Friday, November 9, 2018

Similar to stock buybacks, token buybacks involve a cryptocurrency project buying back its tokens from existing holders. We’ve come across a number of examples and have divided the token buybacks into three categories:

Buybacks Instead of Dividends

Some projects have explicitly mentioned buybacks as a core feature of their business and token economics. The best examples are the successful Asian crypto exchanges (Binance, Huobi, Kucoin) and their respective exchange tokens (BNB, HT, KCS).

These exchange tokens have three functions:

  1. Medium of Exchange / Trading Fee
    Token holders can choose to pay their trading fees in tokens.
  2. Discount Mechanism*
    If token holders pay the trading fees in tokens, they receive a discount on the fees.
  3. Buyback Rights / Periodic Payouts
    The exchanges pledge to use a percentage of revenues/profits for buybacks on a regular basis.

Given the large volumes and revenues generated by these exchanges, the token buybacks have been substantial with Binance and Huobi returning more than $30M back to token holders.

Projects with pledged buybacks

ProjectSectorBuyBacksSourcePost-BuyBackSize
ExchangeQuarterly20% of profitsBurn~ $30M
ExchangeQuarterly20% of RevenuesLocked in Reserve~ $35M
ExchangeQuarterly10% of ProfitsBurn~ $1M
Asset mgmtContinuousVariesBurnN/A

After the buyback, the tokens are burned by a smart contract and/or deposited into a wallet with no private key. As a result, the profits used for the buyback should – theoretically speaking – be fully captured by token holders. In the words of Vitalik – the token’s value is “backed by the future expected value of upcoming fees spent inside the system”.

Or, put simply: the tokens are similar to “traditional” equity because the buybacks ensure that token holders receive (part) of the profits created by the project – just like dividends paid to shareholders**.

Buybacks to Correct Token Allocation

One of the biggest challenges of cryptocurrency projects and ICOs is the initial token allocation. Many projects reserve a fixed amount of tokens to incentivize future partnerships, developers etc. A potential outcome of this “one shot allocation” challenge is that there aren’t enough tokens to hand out a few months/years down the line.

That’s why a handful of projects have started buying back tokens in the secondary market to mitigate this issue. Some examples:

Aragon: The well known DAO project Aragon has been buying its token on a regular basis and has published quarterly reports and guidelines.

Pundi X: The crypto payments and point of sale project Pundi X reported buying ~2000 ETH worth of tokens in June to be put into a partnership reserve.

(more…)

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ICOs are dead – long live the ICO

Wednesday, November 7, 2018

Token and ICO fundraising continued a steep decline in July 2018. 40 ICOs and (private) token sales raised a total of $417M – down from $585 Million in June and $2 Billion in May. This is the lowest monthly amount we’ve measured since May 2017.

A closer look at the data reveals the following:

  1. No “mega” ICOs: While the summer of 2017 was characterized by the first “mega” ICOs (Tezos, Status, Bancor), the summer of 2018 is characterized by their absence. There have not been any sales that have verifiably raised more than $100 million in June or July 2018.
  2. U.S. teams are absent in public sales: Only a handful of cryptocurrency teams in the U.S. are still raising funds through public ICOs. Most – if not all – activity has shifted to private sales and traditional equity rounds. We’re not seeing this shift in Europe…yet..
  3. Tokens underperform: Token prices have cratered in the past months – some dropping more than 80% (more on that below). As shown in the table below, the median return of all ICO issued tokens is now -20% (0.8x). Moreover, ICO-issued tokens not only underperform relative to their ICO sale price but also to Bitcoin and Ether.

The “worst cohort” of tokens are those issued in the first half of 2018 – especially those issued by ICOs that took place at the peak of the cryptocurrency boom. For the 100 tokens issued in Q1 2018 the median return is -60% (0.40x), compared to “just” -30% (or 0.7x) for a portfolio consisting of Bitcoin.

Median Returns by ICO Date

ICO DateNr of ICOsTokenETHBTC
2017 Q168.9 x33.6 x6.9 x
2017 Q2421.8 x1.8 x3.0 x
2017 Q3611.0 x1.8 x2.0 x
2017 Q4841.1 x1.3 x0.9 x
2018 Q11000.4 x0.5 x0.7 x
2018 Q2340.6 x0.8 x0.9 x
_3270.8 x1.1 x1.0 x

It’s safe to say that the correction in cryptocurrency prices and increased regulatory attention have finally had an effect on the ICO market. Although we’re hesitant to pronounce “the death of the ICO” we believe that the corrections in both new capital and trading activity are well-needed and long overdue.

The Decay of Token Prices

In addition to calculating the returns by ICO date, we’ve done a full historical analysis of more than 300 ICOs that have taken place since January 2017. As shown in the graph above, the individual tokens (in red, left axis) traded as high as 200-250 times their original ICO price during December 2017 and January 2018.

But – as cryptocurrency markets have corrected – the combined value of these 300 tokens has dropped by more than 80% since the peak in Q1 2018. A hypothetical cryptocurrency portfolio consisting of all 300 tokens would now be worth ~$600 versus $3500 at the peak (in purple and right axis). While this $600 is still double the original investment of $300 (black line), we highly doubt that we’ll see the levels of Q1 2018 soon or ever again…

*If you have questions about this analysis or any data-related queries, reach out to our research team ([email protected])!

**Methodology is as follows

  • ICO Selection: Select all ICOs which raised at least $1 million and calculate the token price during the ICO
  • Token Selection: Select only tokens which are publicly traded and have daily trading data available
  • Individual Token Values: (red lines) Rebase all tokens to $1 investments at the ICO end-date and calculate return multiples
  • Cumulative Token Value (purple line): Calculate the sum of all Individual Token Values Investment (black line): Calculate the sum of all $1 investments into ICOs over time.
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Mega-ICO-saur sale extinction?

Wednesday, August 1, 2018

July had the lowest ICO activity in more than a year

Token and ICO fundraising continued a steep decline in July. 40 ICOs and (private) token sales raised a total of $417M – down from $585 Million in June and $2 Billion in May. This is the lowest monthly amount we’ve measured since May 2017.

A closer look at the data reveals the following:

  1. No “mega” ICOs:  While the summer of 2017 was characterized by the first “mega” ICOs (Tezos, Status, Bancor), the summer of 2018 is characterized by their absence. There have not been any sales that have verifiably raised more than $100 million in June or July 2018. 
     
  2. U.S. teams are absent in public sales: Only a handful of cryptocurrency teams in the U.S. are still raising funds through public ICOs. Most – if not all – activity has shifted to private sales and traditional equity rounds. We’re not seeing this shift in Europe… yet…
     
  3. Tokens underperform:  Token prices have cratered in the past months – some dropping more than 80% (more on that below). As shown in the table below, the median return of all ICO issued tokens is now -20% (0.8x). Moreover, ICO-issued tokens not only underperform relative to their ICO sale price but also to Bitcoin and Ether.

    The “worst cohort” of tokens are those issued in the first half of 2018 – especially those issued by ICOs that took place at the peak of the cryptocurrency boom. For the 100 tokens issued in Q1 2018 the median return is -60% (0.40x), compared to “just” -30% (or 0.7x) for a portfolio consisting of Bitcoin. 

It’s safe to say that the correction in cryptocurrency prices and increased regulatory attention have finally had an effect on the ICO market. Although we’re hesitant to pronounce “the death of the ICO” we believe that the corrections in both new capital and trading activity are well-needed and long overdue.

Cheers,

Ricky from TokenData

The Decay of Token Prices

In addition to calculating the returns by ICO date, we’ve done a full historical analysis of more than 300 ICOs that have taken place since January 2017. As shown in the graph above, the individual tokens (in red, left axis) traded as high as 200-250 times their original ICO price during December 2017 and January 2018. 

But – as cryptocurrency markets have corrected – the combined value of these 300 tokens has dropped by more than 80% since the peak in Q1 2018. A hypothetical cryptocurrency portfolio consisting of all 300 tokens would now be worth ~$600 versus $3500 at the peak (in purple and right axis). While this $600 is still double the original investment of $300 (black line), we highly doubt that we’ll see the levels of Q1 2018 soon or ever again….

A high resolution PDF version of graph can be downloaded here.

*If you have questions about this analysis or any data-related queries, reach out to our research team ([email protected])!

**Methodology is as follows

  • ICO Selection: Select all ICOs which raised at least $1 million and calculate the token price during the ICO
  • Token Selection: Select only tokens which are publicly traded and have daily trading data available
  • Individual Token Values: (red lines) Rebase all tokens to $1 investments at the ICO end-date and calculate return multiples
  • Cumulative Token Value (purple line): Calculate the sum of all Individual Token Values
  • Investment (black line): Calculate the sum of all $1 investments into ICOs over time
[addtoany]

ICOs raised $2B in May 2018 and $10B in 2018 ytd

Wednesday, June 6, 2018

ICOs raised $2 billion in May and $10 billion in 2018

ICOs raised a total of $2 billion in May 2018 with the following breakdown:

  • 53 completed ICOs raised a total of $1.1B in May 2018 – versus $548M in April. 
  • The EOS sale raised a total of $913M in May 2017 – versus $597M in April. 

When we add it all up, ICOs have raised a staggering $10 billion in 2018 year-to-date.. The May 2018 numbers came as a surprise to us, because we were seeing a downward trend, high ICO project failure rate (50-60%) and “bear market” conditions. 

We’ve taken a closer look at some of the trends behind the increase:

  1. EOS..: The EOS token sale raised close to $1 billion in May. This is the highest monthly amount since the sale started in June of 2017 and it brings the project’s total to $4.2 billion (measured at daily closing prices). We do like to point out that there are plenty of articles online (e.g. 1, 2, 3and 4) that take a closer look at the project and some of its fundraising claims. 
     
  2. “Mega” private sales out of Israel: Two token projects out of Israel (Orbs and Pumapay) each announced 9-digit private sales ($118M and $117M), eschewing the pre-sale and public sale parts of the ICO altogether.
     
  3. Momentum out of Asia: Token projects out of China, Hong-Kong, Korea, and Singapore have continued the momentum we first documented in February, raising $350 million in May

Given that the EOS sale has ended on June 1st and makes up one third of all capital raised in 2018, we expect this month’s number to come out lower….unless people really want to buy some tokens from a struggling headphones maker

No ICO?!?!? Y U DO DIS?

Combing through the hundreds of token projects (>400), we are always pleasantly surprised to find high-quality teams that don’t believe ICO is the best way to start their crypto venture. 

A great example is the team behind Set Protocol, who have been “building” a protocol to create decentralized crypto baskets and indexes. We sat down with the founders to discuss their project, MainNet launch, and their decision to NOT do an ICO. Check out our feature about them!

If you know any quality teams that are skipping an ICO and that you would love to have featured by us – hit us up on [email protected] !

Cheers,

Ricky from TokenData

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Q&A with Set Protocol – Decentralized Crypto Baskets

Monday, June 4, 2018

The explosion of ICOs has led to an exponential increase in the number of ERC-20 tokens that are actively traded. There have been dozens of ICOs and matching numbers of tokens for each new blockchain use-case. As a result, many users and investors in the crypto space frequently ask the following questions:

  • “How can I transfer multiple different tokens in one transaction?”
  • “Are there crypto benchmarks and index funds that I can buy?”
  • “How can I easily invest in a whole sector or use-case?”.

In this product deep dive, we talk with the Set Protocol team. During the past months, the Set Protocol team has been building (or should we say “buidling”) a toolset that allows people to easily create, buy and transfer baskets of tokens.

The best part?

They’re doing this without an ICO AND have launched on Ethereum MainNet already. Check them out on TokenSets.com and enjoy the Q&A!

Set Protocol: Decentralized Baskets of ERC-20 Tokens

Q: What is Set Protocol?

A: In technical terms, Set Protocol is an open-source collection of smart contracts that allows users to group together different ERC20 tokens into a single “higher-order” ERC20 token: a Set.

This comes with a number of benefits:

  • Ownership: The owner of any Set has direct ownership and full custody of the underlying ERC20 tokens.
  • Transferable: Popular Sets can be transferred or listed on centralized and decentralized exchanges like any other token.
  • Redeemable: Any Set can be unbundled back into the underlying tokens whenever a user wants.
  • Cost-efficiency: Users can transfer ownership of multiple tokens in one transaction (by transferring the Set) rather than one transaction per underlying token
  • Atomically Divisible: Because a Set is an ERC20 token itself, you can transfer fractions of it.

Q: How does this apply to cryptocurrency indexes and ETFs?

A: In US equities, ETFs make up 30% of dollar volume and 23% of share volume, and 7 out of 10 of the most actively traded instruments in the US are ETFs. If there’s any translation from equities, the potential for crypto indexes is huge. Set Protocol allows a user to build Sets composed of any combination and proportion of ERC-20 tokens. If the creator so chooses this can be used to approximate a cryptocurrency index. For example, any user can create an index that includes the most popular ERC-20 tokens and then use that index as a token.

Our goal is to give these tools to the broader cryptocurrency community and see what new possibilities come up that we haven’t thought about before.

Q: What makes Set Protocol different from existing cryptocurrency index and basket solutions?

A: The cryptocurrency index sector is still small with most existing index offerings functioning in a traditional/centralized manner (e.g. CoinbaseBitwise). They’re great solutions, but bring over a lot of the issues that exist in traditional index funds and ETFs for equities etc.

Since Set is an open protocol it mitigates many of these issues by enabling:

  • Access to everyone: The divisibility of a Set means that they’re open to everyone without large minimums
  • Full ownership: Sets themselves are ERC20 tokens that can be freely transferred or liquidated (into the underlying tokens) at any time.
  • Customizability: Anyone can create a Set that represents a certain sector of the crypto ecosystem

Q: One of the questions that comes to our minds when thinking about the challenges around decentralizing indexes, is how rebalancing of a Set will take place. Have you thought about this?

In the first iteration of our protocol, the list of tokens and weights assigned to each token in the Set are static. We are exploring rebalancing mechanisms going forward, such as:

  • Vintages: Each month or quarter, a new Set can be created with the most recent quantities and tokens. Rebalancing would be opt-in by the user, trading the outdated version for the more updated Set.
  • Trustless Algorithmic Rebalancing: Instead of a user-instantiated rebalance, the smart contract itself would initiate an auction for the rebalance itself.

TokenSets: The Platform to Manage Sets

“With TokenSets we’re aiming to push the boundaries of solid UX in the crypto world.”

Q: You guys just launched the Beta version of TokenSets on MainNet. What is TokenSets?

A: We’re trying to build an ecosystem around the Set Protocol. We continuously ask ourselves “How do we make it as easy as possible for users to use our protocol?”

We believe this question is actually split into two:

  1. UX: How easy is it to create and manage Sets?
  2. Liquidity: How do people fund and transfer Sets?

TokenSets is the initiative that we’re building on top of the Set Protocol to answer both questions. TokenSets is the first consumer-facing platform and we hope it creates a standard for other developers who want to use the Set Protocol. With TokenSets, people will be able to:

  • Manage and View Sets through a dashboard that links to MetaMask
  • Bundle and Unbundle instances of existing Sets

Eventually we are looking to add the functionality to create, design, and launch a Set using a creation flow.

Managing a Set composed of Decentralized Exchange tokens

Q: What are the features in this first launch?

A: In our first MainNet release, people are able to bundle, unbundle and track the performance of a number of existing Sets. We’re launching with three example Sets:

  • EthereumX Set: The top 10 ERC-20 compliant tokens with threshold valuations, liquidity and security features. Buy one token that represents the current Ethereum ecosystem.
  • DEXSet: A Set of DEX protocol tokens that are building out the future of decentralized trading and exchanges.
  • StableSet: The composite stable coin. By bundling multiple stable coins together, you can spread the risk of price stability and the risk of one stable coin system failing.
Sets offered in the TokenSets MainNet launch

Q: Will TokenSets create Sets?

A: Initially, we will offer a few Sets as examples of what can be created with Set Protocol. However, it is our intention to only provide the tools and infrastructure that enables users to design and create their own Sets. We want to allow the developers and creatives the ability to build Sets they think people will want.

Q: How will creators of Sets, be able to make money?

A: The creator of a Set incurs costs in sourcing the underlying tokens and also provides a valuable service in researching and constructing the optimal Set. If there is an influx of demand of a particular Set, it will be reflected in the price of the Set in the market. Thus, there will be arbitrageurs who will come into take advantage of these price differences. We expect Sets to be priced at a small premium to the sum of the underlying tokens.

TokenSets serves as a proof of concept for proving out Set Protocol and does not charge users in any way. However, we’re also exploring other monetization efforts for Set creators and TokenSets as a platform.

Q: One of the main “complaints” in the crypto space is a lack of good UX. What’s your view on this?

A: Our goal is to make the dApp experience as enjoyable as possible within the constraints of the tools we have. There are a lot of great protocols out there that are facing low user adoption because of unpolished UX, and the fact that there isn’t much support for good UX in the crypto space to begin with. In the most ideal world, the end user wouldn’t even realize they’re interacting with the blockchain at all, but we have a ways to go until we get there. With TokenSets we’re aiming to push the boundaries of solid UX in the crypto world.

Q: It’s refreshing to see more and more teams like Set Protocol building a product before or without an ICO. Can you shed some light on your decision to not launch a token and raise an equity seed round?

A: Our views in regards to a token sale echo that of Dharma’s. Because token sales are a great fundraising mechanism, we’ve seen many projects pursue token sales in 2017 and the beginning of this year. However, we’re finding that many teams are thoughtlessly cashing in on the fundraising frenzy, as opposed to considering the merits of a token sale. We’ve thought about it carefully and have concluded that a token sale does not make sense for us for a few major reasons:

  1. Lack of appropriate token model: At the moment, there isn’t a sustainable token model that makes sense yet. The models that we’ve seen that could potentially work are a) money (e.g. Platform token like Bitcoin, ETH, or zCash) and b) staking tokens (e.g. ETH).
  2. Regulatory uncertainty: With the regulatory uncertainty in the US, many tokens are likely to be considered securities. We’d like to see more regulatory certainty before we consider a token sale more deeply.
  3. Optionality: Performing a token sale locks a project into a particular technical stack, investor base, and monetization model. We’d prefer to carefully consider all of our options before locking ourselves into a particular stack.

Q: Developing a protocol and ecosystem like Set Protocol is a large undertaking and feedback from other developers and partnerships within the decentralized financial stack are crucial to success. Are there any areas in which you need help or like to get feedback?

A: Try out TokenSets first! We’re always looking for honest and open feedback. We want to hear from the community what features they’re looking forward to most on Set, we’re sure there are features we haven’t even thought of yet. Here are a few features we’re building and/or thinking about:

  • Create your owns Sets
  • Non-fungible Sets (booster packs, crypto composables)
  • Developer tools. An API for Set data, price data, historical data, and images, and a Javascript library that allows you to integrate Set tools into your own wallet or dApp.
  • Trustless algorithmic rebalancing

If you have features you’re really excited about or want to chat with us, we’d love to hear from you on our Slack channel!

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Thanks to Inje Yeo and the whole Set Protocol team for participating in this Q&A!

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