What is Set Protocol?

Set Protocol is an Ethereum-native DeFi primitive that leverages existing Open Finance protocols to allow for the bundling of crypto-assets into fully collateralised baskets, which are represented as ERC20 tokens on the Ethereum blockchain.

Set Protocols most exciting feature is that it allows for the creation of structured products that gives users of all experience access to the future of decentralised, on-chain asset management. From an every day investor wanting to manage their portfolio and allow his friends to share his strategy, to institutional-grade asset managers wanting to create structured products for their clients in a transparent and trustless way. Today, some of the largest structured products by AUM (assets under management) have been built using the Set Protocol, including the DeFi Pulse Index ($DPI) and ETH 2x Flexible Leverage Index.

What is TokenSets?

TokenSets is the first application built on the Set Protocol, which allows users and asset managers to create and manage their tokenised strategies by interacting with the underlying smart contracts.

How is Set Labs Inc. related to Set Protocol?

Set Labs Inc. is the company building the Set Protocol smart contracts. Set Labs Inc. does not serve as managers for any Sets, act as a counter-party, or custody anyone’s funds on TokenSets.

What is a Set?

A Set is a digital asset (ERC-20 token) that represents a fully collateralized portfolio of assets that can enable people or entities to manage their wealth & the wealth of others within a customizable and trustless environment. Set empowers individuals or institutions to create, manage and invest in innovative on-chain investment vehicles.

Sets are ERC20 Compliant

Build applications that are interoperable out of the box. Each Set itself is an ERC20 token with additional properties.

  • Listable on Exchanges

  • Borderless Transactions

  • Smart Contract Ready

Sets are Fully Collateralized

Holding a Set token guarantees you access to your underlying tokens. Redeem your underlying tokens by trading it back into the Set smart contract.

Sets are Trustless

Set is open, permissionless, and requires no middlemen or trusted counterparties. Set is designed so that no one can steal the collateral that backs the value of your Set.

Who custodies the Set and it's collateral?

  • Set Tokens Sets that you obtain through TokenSets or third party exchanges are held in your own ERC-20 compatible wallet. Since Sets are ERC-20 tokens, you can move them to any other wallet that also supports ERC-20 tokens, such as if you want to hold them in an Ethereum address you use for cold storage. All transactions that move your funds must be confirmed by your account and are verifiable on the Ethereum blockchain.

  • Underlying Collateral Tokens The underlying collateral tokens that back each Set are held inside the specific Set Smart Contract itself. The manager of a set cannot withdraw these tokens that collateralise the Set, instead, the contract enables the manager to transact the assets between one another to enable their strategy. For example, the DeFi Pulse Index's underlying collateral can be seen here on Etherscan.

What are the fees involved on the protocol?

We have not and do not take fees on Tokensets. The fees incorporated into the transacting process are strictly network fees that are paid to Ethereum

How do I value a Set?

A Set is 100% collateralised by its underlying components, which means its 'Net Asset Value' (NAV) can be calculated by adding up the value of all the underlying component tokens inside of the Set. Prices displayed on TokenSets are sourced from CoinGecko to show the fair market value of a Set across multiple exchanges, on-chain prices used by our smart contracts are sourced from Chainlink oracles, and prices for buying and selling are sourced from DEXs that provide liquidity to Set Protocol.

What are the tax implications of trading Sets?

Taxes vary greatly by jurisdiction. For any financial, tax, or legal matters, we recommend consulting your own professionals. While we cannot provide you with specific tax guidance, users should be aware that any exchange of crypto (e.g. ETH to WBTC) may be a taxable transaction in their jurisdiction. In certain jurisdictions, users may be able to recognise short or long term capital gains or losses when selling Sets they’ve acquired rather than after each rebalance. Because of the variety of outcomes based on jurisdictions, we are unable to provide a definitive answer to the tax treatment of TokenSets.

How secure is Set Protocol?

Security of our system is of the utmost importance to us. We recognise the complexity of the protocol, the difficulties in deploying issue-free software, and the responsibility of maintaining a value-bearing protocol. Therefore, we’ve made a considerable effort to ensure the system has been reviewed by top security firms such as ABDK, iosiro and PeckSheild and heavily scrutinised line by line internally. We reached out to PeckShield for our audit, which you can see here:

Our Set Protocol contracts repository has 100% line and branch coverage over the span of over 840+ unit, integration and simulation tests. But you don’t need to take our word for it, every line of smart contract code for Set Protocol is open source, and we encourage technical community members to review and verify our code

Set Protocol Github

What are the risks of Set Protocol

Smart Contract Risk

We take smart contract security extremely seriously at Set. All of our contracts that have been deployed to the Ethereum mainnet have been audited by reputable security firms. Additionally, we have 100% test coverage, run integration/scenario/blackbox tests, do internal smart contract audits, and run modeling to look for adverse cases.

It’s important to note that even though our code has been audited and tested many times, there is still a risk that some edge case or bug exists which could result in user funds being lost.

Asset Risks

Currently, Sets can be collateralized with an extremely vast array of assets. Please consider the individual, external asset risks when using the protocol. Some examples, albiet unlikely, of assets that inheritently have a risk profile are as follows.

  • WBTC — Counterparty Risk

    WBTC, or ‘Wrapped Bitcoin’, is similar to WETH but with one key difference — it is 100% custodial and centralized. The WBTC initiative is led by Kyber Network in partnership with BitGo. The short of it is that every 1 WBTC that is minted on the Ethereum network is backed by 1 BTC in a vault controlled by BitGo. The WBTC smart contract also has a pause function which allows its central operator to freeze WBTC assets at any time.

    If this function was called to freeze WBTC deposited into Sets as collateral, or if the vault housing the BTC that backs WBTC is hacked, the expectation is that any Sets collateralized by WBTC would become worthless.

  • USDC — Counterparty Risk

    USDC is a stablecoin tied to the US dollar created by Circle and Coinbase. It is 100% centralized and, like WBTC, has a pause function built right into its smart contract that would allow Circle or Coinbase to freeze anyone's USDC assets at any time.

    If this function was called to freeze USDC deposited into Sets as collateral, the expectation is that any Sets collateralized by USDC would potentially become worthless (depending on if the assets were unfrozen at a later date).

Performance Risks

One risk to consider when carefully allocating your capital is the strategy of the Set token and individual/entity behind it. Once you are invested in a Set, the manager then dictates the performance of the Set with the strategy he has adopted which has no garauntees of performance.