【Special Feature】Fearful of Teachers Running Away Most, How Decentralized Protocol TokenSets Solves Trust Issues in Delegated Operation

Most people's understanding of DeFi (Decentralized Finance) is mostly limited to decentralized lending platforms like Compound or dydx. However, in reality, as the infrastructure matures, the diversity of decentralized financial products is richer than you might imagine, and TokenSets, born in 2019, is the best example of this.

TokenSets: Solving the Trust Issue in Asset Management

TokenSets is a decentralized asset management platform built on the Set Protocol. While Compound offers decentralized finance products similar to bonds, TokenSets provides products like Crypto Funds for asset management and custody. You might wonder, with so many Crypto Funds available publicly or privately, what makes TokenSets special.

Although there are numerous Crypto Funds available for investment, they commonly share a similar issue - the need to entrust your assets to a custodian. This inevitably leads to a "trust issue" where you have to trust that the custodian won't mishandle your assets. If the custodian disappears or refuses to return your funds, your assets could be lost, a scenario experienced by many in the Taiwan crypto community.

TokenSets distinguishes itself by being a "decentralized financial product," where all operations are executed on-chain, and all custodied assets are stored in smart contracts, ensuring 100% ownership of the user's assets. In other words, TokenSets addresses the trust issue prevalent in traditional Crypto Funds. This is undoubtedly a boon for beginners who are unfamiliar with trading and reluctant to entrust their assets to others. Despite being launched for over a year, TokenSets has yet to gain significant market traction, a topic we will explain later.

How to Trade in a Decentralized Manner?

One common question that arises is, as a decentralized Crypto Fund, how are trades executed when buy or sell signals are generated? Won't there be a single point of failure if trades are processed through exchanges? Moreover, funds need to be deposited into exchange wallets, how can ownership of the assets be guaranteed? How does TokenSets handle this liquidity issue?

On TokenSets, executing a trade means adjusting the investment portfolio of the product, also known as "rebalancing." All products on the TokenSets platform are collectively referred to as Sets, a concept similar to mutual funds in traditional financial markets.

Each Set is an ERC20 token with its own investment portfolio. For example, the LINK/ETH Price Action Candlestick Set has a fixed portfolio of LINK and ETH, but the allocation of this portfolio varies. When a buy or sell signal is generated, the smart contract adjusts the allocation of LINK and ETH. For instance, if the initial composition of the LINK/ETH Price Action Candlestick Set is "50% LINK, 50% ETH," and a buy signal occurs, the smart contract may adjust it to "70% LINK, 30% ETH."

Initially, TokenSets adjusted portfolios by integrating with decentralized exchanges like Kyber Network. However, due to the risk of slippage from large capital inflows, a Dutch auction mechanism similar to other DeFi projects is now used to adjust portfolio compositions. During the "rebalancing" phase of a product, the Set Protocol's smart contract initiates a Dutch auction, allowing participating market makers to provide liquidity.

Quantitative Trading and Copy Trading

Currently, TokenSets offers two main types of financial products. The first is fixed quantitative trading strategies - Robo Sets, which manage funds using predetermined trading strategies.

The other is automatic copy trading strategies - Social Trader Sets, similar to the fund management approach of Bincentive. When an asset manager executes trades, TokenSets' smart contract mirrors the same actions, akin to the familiar concept of Copy Traders Steve and Dave. If you are confident in your trading strategy, you can apply to become a trader and earn performance and management fees.

For investors, the process of investing in these two products is the same, with the distinction that Social Traders incur management and performance fees, while Robo Sets do not require these fees.

Promising Future Ahead

Overall, TokenSets leverages the value of blockchain technology to address the trust issues in traditional managed funds. For investors, focusing on the fund's performance without worrying about embezzlement or platform closure risks is a significant advantage in the cryptocurrency market filled with pitfalls and risks. However, the platform's lack of diversity in supported investment targets, difficulty in achieving high-frequency trading, and the absence of support for leveraged derivatives are reasons why TokenSets has not gained substantial traction in the cryptocurrency market. Additionally, the most significant issue is that the performance of most products on the platform does not surpass simply holding Ether, lacking sufficient appeal to investors. Nonetheless, TokenSets' concept is commendable, and with expanded support for more investment targets and collaborations with renowned traders to attract users and attention, there is still ample opportunity for TokenSets to shine in the DeFi space in the future.