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!