Set Protocol Architecture: Everything You Need to Know About DPI’s Foundations

As our world becomes increasingly tokenized, structured product solutions that abstract the portfolio management process and cater to specific themes will become more important than ever. In traditional finance, abstraction to passive solutions has been a key driver of the popularity of indices such as the DJIA and the S&P 500. Set Protocol enables the creation of structured products that benefit from this abstraction trend, applying this same principle to crypto markets by bundling groups of tokens into single ERC-20s for ease of investment.

What is Set Protocol?

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

How does Set Protocol work?

The Set Protocol ecosystem has three core users: Investors, Managers, and Developers.

• Investors: Investors allocate capital to Set tokens in order to hold the bundle of assets as represented by the Set. If you hold an Index Coop product, you are a capital allocator.
• Managers: Managers are the creators and maintainers of structured products built on Set. Index Coop and DeFi Pulse collectively manage the $DPI token, for example.
• Developers: Developers work on and expand the existing Set Protocol architecture.

In its simplest form, the Set Protocol enables managers to identify the needs of investors and then work with developers to create a Set token using a specific methodology.

What are the benefits of Set tokens?

Set tokens are ERC-20 tokens that can be transferred, traded, or used throughout DeFi just like any other token. Here are some of their advantages:

• Gas Savings: Without a Set token, acquiring all the underlying tokens and regularly rebalancing them following a specific methodology would cost a lot of gas. By using Sets, users can gain exposure to a variety of assets with a single transaction.
• Fully Collateralized: Set tokens are collateralized by the underlying components of the index, which are transferred and stored in a vault with the Set token issued against those assets.
• Redeemable: Because Set tokens are fully collateralized, they can be redeemed or traded for their underlying components at any time.
• Trustless: Developers from Set ensure that the token operates only as programmed, and all code is open source for anyone to review.

For more information on Set Protocol, check out the whitepaper or their docs. You can also visit TokenSets to explore currently available Set tokens.