Set Labs, San Francisco-based investment platform, unveiled an Ethereum-based financial trading instrument that captures crypto’s volatile attributes for the investor’s benefit.
The “Trend Trading ETH 20 Day Simple Moving Average Crossover Set” uses a two year back-tested “moving average” to capture the momentum of price swings and limit losses in the market.
The ETH Crossover Set uses the ERC20 token to represent user’s funds as either Ether or as Coinbase’s stable USDC. The Set employs two MakerDAO’s ETH/USD price oracle ts to track the daily price and moving average of Ether and is programmed to make trades “whenever the current price of ETH crosses the 20 Day Simple Moving Average indicator.”
If the Set is currently in ETH and the price goes below the moving average, it rebalances ETH into USDC. Likewise, if the Set is currently in ETH and the price goes above the moving average, it rebalances USDC into ETH. “Essentially, you would be momentum investing or swing trading,” said company CEO Felix Feng.
He said:
“Typically, momentum trading is effective in markets that 1) do not have valuation models, 2) have large amounts of volatility, and 3) have frequent mispricings. Momentum investing is not typically used in US stocks, bonds, or options – as they have clear valuation models (e.g. discounted cash flow analysis for stocks and black Scholes for options). However, for commodities and assets like crypto – momentum trading can be an effective strategy that allows protection from losses in downtrends and capture subside on the uptrends. Based on historical data, this may be an extremely effective strategy – until a valuation model has been figured out.”
As opposed to manually reviewing trend lines and executing trades on a centralized exchanges, or delegating these decisions to a manager of a hedge fund, Set applies technical indicators encoded in smart contracts to remove human decisions from quantitative trades.
A six to twelve hour confirmation period prevents unnecessary trades. Additionally, the protocol is programmed with a minimum rebalance interval of four days.
The moving average is calculated by recording daily prices in a DailyPriceFeed smart contract and taking the average of the past 20 days of price data. The underlying price data is sourced from MakerDAO’s price oracles.
In that sense, the Set is similar to trading bots on exchanges – however, “instead of users setting up trading bot infrastructure, they subscribe to the strategy by acquiring an ERC20 token,” Feng said.
The automated procedure also differentiates it from decentralized finance competitors Melonport and BeToken, which are “similar but operate more as decentralized hedge funds.”
Set Protocol
The company deployed the Set Protocol system to the Ethereum mainnet in April 2019 along with the launch of TokenSets, the dApp, and two trading strategies: Buy and Hold and Range Bound.
Buy and Hold is similar to a traditional index fund, where one Set token is collateralized by multiple underlying assets, in this case BTC and ETH, which automatically rebalance back to a target allocation. Currently, users can invest in an equally weighted or 75/25-percent split strategy.
Range Bound strategies are similar to holding a portfolio of cash and volatile assets represented as a token. It uses Dai as “cash” and either ETH or BTC as a volatile asset.
TokenSets is non-custodial and has approximately 400 unique users representing $430,000 in collateralized assets. It currently does not charge fees.
“Since Sets can be configured to rebalance on any on-chain indicator, we can also build trading strategies built on fundamental indicators and eventually combine multiple indicators to build complex algorithmic strategies,” said Feng. He cited exponential moving averages, relative strength indexes, and moving average convergence divergence.
Set Labs, the company behind Set Protocol, was founded in 2017. It is not yet profitable, but has completed a series seed fundraising of $2 million dollars led by Craft Ventures and Vy Capital with participation from Kindred Ventures, DFJ, Haystack, Social Capital, and angel investor Scott Belsky.
Business miniature image via Shutterstock