Set Protocol — Enabling Programmable Assets

Breaking down the different trading categories on TokenSets

Set Protocol allows for the bundling of crypto-assets into tokenized baskets that can be programmed to automatically restructure based on any management or trading logic.

Earlier on in Set Protocol’s life it was known as a product that took existing tokens (ETH, DAI etc) and bundled them together to create a meta-token — often referred to as a “basket” of assets. After the launch of the Trend Trading category on TokenSets, the real magic of Set Protocol was unleashed in the form of showcasing how these tokenized baskets are programmable. This means that Sets can be structured to automatically rebalance and trade based on a wide range of parameters and strategies.

In this piece, we’ll breakdown the current offerings on the TokenSets website and the other Sets that can be built, both by us and any budding developer, to further increase the range of strategies that are available.

We currently split our Sets into 3 distinct categories on TokenSets — Buy and Hold, Range Bound and Trend Trading.

Buy and Hold

The Buy and Hold strategy automatically rebalances underlying crypto to maintain a fixed ratio over time. Sets under this strategy are meant to be held if you’re bullish crypto but want to spread your risk over multiple tokens.

A good example of a Buy and Hold Set is the BTC ETH Equal Weight Set which consists of equal weights of both Wrapped Bitcoin (WBTC) & Wrapped Ether (WETH) that automatically rebalances every 30 days if there is a 2% or greater price difference between the two assets. This strategy is designed to capture outperformance on the ETH/BTC ratio over long periods of time.

We imagine that developers will create different Buy and Hold strategies based around investment perspectives. For example, the creation of a ‘DEX Token Index’ could be programmed to track the performance of a basket of exchange tokens such as ZRX, KNC, LRC and AST at any asset weight, rebalance interval and price difference.

Range Bound

Range Bound strategies are intended for neutral or bearish markets. This strategy outperforms the benchmark asset in bearish markets, but underperforms in bullish markets. This strategy automates buying when prices go down and selling when prices go up, taking advantage of price movements when prices bounce within a designated range. Under the right conditions, this provides the potential for users to accumulate more crypto while minimizing the risk of sudden adverse price changes.

The Range Bound Sets contain a benchmark token (i.e. Bitcoin, Ethereum) and a price stable token (i.e. Dai, USDC), rebalancing between the two when prices rise or fall. In a hypothetical example, if prices dipped 30% for the benchmark token and triggered a rebalance, the benchmark token would be bought using the price stable token to reset the portfolio to its target allocation.

Range Bound Sets can generally perform well in “choppy” markets as these Sets aim to “buy low and sell high” using predetermined criteria. For example, the ETHMINVOL Set automatically rebalances cash (DAI) into ETH if the price of ETH dips more than 10% and ETH into cash (DAI) if the price of ETH rebounds more than 20%.

Trend Trading

Trend Trading attempts to capture value through statistical and market sentiment analysis of an asset’s momentum. Traders use technical analysis to implement strategies such as Moving Averages, Moving Average Convergence Divergence (MACD), Bollinger Bands, and RSI that indicate when to enter and exit a position. When an asset price intersects a trend indicator or signal, the crossover event will trigger a rebalance event to establish new allocations and positions within a portfolio.

Each Trend Trading Set is composed of either 100% of the target asset (e.g. Bitcoin, Ether) or 100% of a stable asset (e.g. USDC, Dai) at any given point based on the implemented strategy (e.g. Moving Averages, Bollinger Bands, MACD). In a hypothetical example, if the price of the target asset falls below its 20 day MA indicating a downtrend, then the Set automatically rebalances from the target asset to the stable asset. If the 20 day MA indicates a trend reversal with price rising above the MA, then the Set rebalances to the target asset.

Trend Trading Sets typically perform better in a trending market. This means that when the market is “choppy” or “ranging” between certain price points, a trend trading Set is more likely to underperform vs simply holding the target crypto asset.

Fundamental/On-chain Strategies

Fundamental, or on-chain strategies, are on the roadmap for release sometime in the future. These strategies would be parameterized to track the various on-chain indicators of different crypto-assets and rebalance accordingly.

For example, a popular on-chain indicator for BTC is the Spent Output Profit Ratio (SOPR) which is calculated as the realized value (USD) divided by the value at creation (USD) of the output. Or simply: price sold / price paid. When SOPR > 1, it means that the owners of the spent outputs are in profit at the time of the transaction; otherwise, they are at a loss.

A Set could be created to track this on-chain indicator and be parameterized to sell BTC when SOPR is > 1 and buy BTC when SOPR is < 1.

Other on-chain indicators, such as active addresses, fees paid, yearly inflation etc could be used in Sets to automate buying or selling of the underlying asset based on if the network is exhibiting strong or weak network health.

Meta-Sets

In the future, Sets will contain one to many other Sets which would allow for the creation of “meta-Sets”.

For example, a meta-Set could be created using the existing ETH20SMACO and ETH50SMACO Sets — let’s call it the ETHMACO Set for simplicity. This meta-Set would not rebalance itself but the underlying Sets would rebalance meaning that the ETHMACO Set would basically track the performance of these Sets.

The ETHMACO Set could be used as an easy diversification tool for those users who simply want exposure to multiple technical indicators through one token.

Exotic Sets

Have an idea for a Set that falls outside of the norm? You’ll be able to easily create it by using our Set Creator sometime in the future. For now, we’ve compiled a short list of ‘Exotic Set’ ideas that we’ve come up with:

Crypto Twitter Sentiment Set — this Set rebalances based on changes in Twitter sentiment around a particular crypto-asset (buys on positive sentiment, sells on negative)

Ethereum Subreddit Activity Growth Set — this Set rebalances based on growth of the various Ethereum subreddits (buys ETH if growth >5% a week, sells ETH if growth <5% a week)

Bitcoin or Ethereum Google search trends Set — this Set rebalances based on growth of the search terms ‘Bitcoin’ or ‘Ethereum’ on Google (buys BTC or ETH if searches have been trending up for a month, sells BTC or ETH if searches have been trending down for a month)

It’s worth noting that these are just ideas and are not currently on the roadmap for implementation. If you’re a developer and are interested in building one of the above mentioned Sets (or any other Set — Exotic or otherwise), be sure to head to our developer documentation portal to get started.

Conclusion

We hope that this piece has helped you to understand the current Set strategies available on TokenSets as well as what we have planned for the future. If you have an idea for a Set or strategy that you’d like to see implemented, please reach out to us at hello@setprotocol.com or join our Telegram chat.

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