How to Get 1-Click Exposure to DeFi Using Set Protocol | Cryptotesters
Logo Cryptotesters

How to Get 1-Click Exposure to DeFi with SetToken

Tue Sep 15 2020
cryptotesters podcast image

The second post of our new Cryptotesters tutorial series will show you how to get 1-click exposure to the best performing DeFi tokens.

With the recent hype around DeFi many new entrants are entering the space and often asking us for advice which tokens to buy. This is an incredibly tough question.

First, it’s difficult from an ethical standpoint to give financial advice to random people on the internet. Second, there are too many (good) projects. Picking just one or two to invest in, might end in tears for investors as the risk is spread too narrowly. Diversifying one’s risk across a basket of assets is the no.1 lesson in any Finance 101 course and the same holds true for DeFi.

What a DeFi novice really wants, is exposure to DeFi as a whole. We’re glad we can now point them towards the newly launched “DeFi Pulse Index” Set from TokenSets!

What is the DeFi Pulse Index?

The “DeFi Pulse Index” is an Ethereum (ERC-20) token that you can buy on Uniswap and other popular wallets. By holding the “DeFi Pulse Index” token you directly invest in the ten most popular DeFi tokens available on Ethereum, including $LEND, $YFI, $COMP and $SNX. The only difference is that instead of having to manually acquire these DeFi tokens one-by-one from different exchanges, you only have to buy one token and pay an Ethereum network fee (a.k.a gas cost) once to buy and sell the index.

The gas cost savings are considerable as you currently have to spend $5-10 on average per token purchase on decentralized exchanges such as Uniswap. You could also try to avoid gas costs altogether by buying the individual tokens on centralized crypto exchanges but there’s no single exchange offering all of the major tokens so you would have to sign-up for 5 different exchanges.

Due to the fact that the DeFi Pulse Index is a standard Ethereum token, it allows for powerful composability within the wider Ethereum ecosystem. It could for example be used as collateral to get a loan on Aave or Compound, mint DAI on Maker or as a staking asset within yield farming. This utility for the token is not available yet but things happen fast in DeFi and it wouldn’t come as a surprise!

How does the DeFi Pulse Index work under the hood?

Under the hood, when you buy one or more DeFi Pulse Index tokens, the TokenSet protocol purchases the underlying tokens utilizing a capitalization weighted index - meaning it buys amounts of each token that are proportional to their relative market cap - and holds them in a vault.

SetProtocol1.jpg

For example, YFI currently has a market cap of $1.2 billion, representing a 25% share of all ten projects' market capitalizations. This means the DeFi Pulse Index pool will hold 25% of YFI tokens.

SetProtocol2.jpg

Structure of the DeFi Pulse index at launch

Since market capitalizations change rapidly, the DeFi Pulse Index rebalances on the first day of every month. If, for instance, $LEND has had an incredible month and makes up 25% of the market cap, the DeFi Pulse Index will reduce its holdings of worse performing tokens and increase its exposure to better performing tokens like $LEND. This is similar to how Index’s in traditional finance like the S&P500 work and it allows the DeFi Pulse Index to accurately track the performance of DeFi.

Do the tokens in the DeFi Pulse Index always stay the same?

The tokens in the DeFi Pulse Index are always subject to change. For the DeFi Pulse Index set, the selection of assets is a joint effort from the DeFi Pulse and the Set Protocol team. If a new DeFi project comes into existence and deserves a spot in the set, there’s chances it will be included. To make the process transparent nevertheless, the two teams established a rigorous methodology to determine if a project fits the criteria to be included.

Here are a few examples of all the criteria that go into the selection process:

  • The token must be listed on Ethereum.
  • All tokens must be bearer assets.
  • Tokens held by the index may not be wrapped or synthetic tokens.
  • Tokens held by the index may not represent options or futures.
  • Tokens held by the index may not represent physical world assets.
  • Tokens held by the index may not represent claims to other tokens on blockchains other than Ethereum.
  • The dApp associated with the token must be listed on DeFi Pulse
  • The dApp associated with the token must be launched and functional for at least 180 days before its associated token may be included in the index.
  • The token must be freely circulating for at least 30 days before it is included in the index.

Where can I buy and sell the DeFi Pulse Index?

The easiest way to buy the DeFi Pulse Index (DPI) Set is to buy it on the secondary market through the TokenSets website itself or through Uniswap (or wallets like Dharma and Pillar Wallet that have Uniswap integrated) and to sell it the same way.

Alternatively, you can also issue the DeFi Pulse Index token yourself by going to the TokenSet website and adding each of the tokens in the set one-by-one in their respective weights. When you add the tokens to the Set Vault you receive the DeFi Pulse Index token in return. However, this process is not meant to be used by the average user.

It is nonetheless interesting to know that the tokens can be issued this way and it helps to understand how the value of the DeFi Pulse Index token is backed. This also ensures that you can always redeem your token against the underlying components by going through the TokenSet website.

The secondary markets like Uniswap ensure that people can buy and sell their Sets anytime without having to go through the much more complex transactions of issuing and redeeming them directly. The price of the DeFi Pulse Index token is always kept on par with the Net Asset Value (NAV) of the underlying assets in the set by arbitrageurs. If the DPI trades under the Net Asset Value of the assets, traders will buy the DPI at a discount on Uniswap and redeem it for the underlying tokens on the TokenSets website.

How to buy the DeFi Pulse Index on TokenSets?

To buy the DPI token on TokenSets, you have to go to their website, connect your Metamask or other Ethereum wallet and click on the “Explore Sets” tab.

You should then see the DeFi Pulse Index as a “Featured Set” (screenshot below). If not you can directly access this page here. SetProtocol3.jpg

Once on the product page you can view performance history of the set and other details. When you have decided you want to buy the Index, click the “Buy” button on the top right. A popup will automatically open and you can select how much of the index you wish to buy. Right below, it will show you how much ETH the transaction will cost, and give you the option to pay with a different currency like DAI, USDC and USDT.

SetProtocol4.jpg

Before you complete the purchase you will see an order summary with key facts about your order. The network fee is the cost to do a transaction on the Ethereum network and is not a fee that goes to SetProtocol. Depending on how congested the network is, the fee may increase or decrease. The premium percentage that you see, is the difference between the price on the secondary market and the Net Asset Value of the underlying tokens. If it’s very high you might want to wait until it’s brought back to parity by arbitrage traders.

SetProtocol5.jpg

If you’re happy to proceed, click on “Submit Buy” and you’ll see your DPI Index token on the TokenSets dashboard shortly after the transaction has been confirmed on the Blockchain.

Conclusion

The DeFi Pulse Index token is an awesome way to get warm with DeFi. We’ll make sure to shill it to whoever asks us for investment tips and we can’t wait to see the ingenious ways it will be integrated into other DeFi projects.

What do you think about the DeFi Pulse Index from SetToken? Tag us @cryptotesters on Twitter and let us know!

Share
Twitter logoLinkedIn logo
cryptotesters author photo
Emanuel Coen

I am passionate about Bitcoin and Ethereum and want to on-board new people to crypto.

Cryptotesters Logo
We are a multi-faceted team of crypto enthusiasts based in Berlin.
Twitter logoLinkedIn logoFacebook logotelegram logo