DeFi(ne) the Future: Case on ERC20 and SET
As a non-fungible digitized asset that’s currently on a swing similar to the 2017 bull run, cryptocurrencies are no secret to investors now. I believe that the most important aspect of Blockchain-powered systems or decentralized applications is its utility in financial systems and operations, more broadly: DeFi. Ever since June of last year DeFi tokens like Set, Compound, Balancer, & bZx have been hot and opened up an enormous door for individuals interested in markets and their microstructures. I’m personally interested in quantitative finance and the algorithms that regulate market operations, so when a crypto start-up right out of Berkeley (the Set Protocol) allowed for the utilization of liquidity from decentralized exchanges for redemption, I was hooked.
Blockchain systems were largely contained within their own structures. Only recently did people create transfers with BTC Cash and further. When I had the opportunity to work with NEO Smart Economy on their research team with pBFT systems, I saw that there was still a degree of self-containment with their approach on decentralized enterprise software.
With altcoins shooting out all over the place, it was odd that these coins weren’t linked in some direct way. Bitcoin as a system was severely flawed and rather acted as a precursor to these coins. Shouldn’t these coins improve and innovate upon BTC rather than remain stagnant as an option?
I first found out about DeFi protocols while interning for crypto trading microfund last summer. As mentioned before while looking for some potential investment leads, Set was thrown around in a few forums and I went to check out the hype (at the time it was around 90+% up and was still climbing). Set essentially facilitates the creation, issuance, redemption, and rebalancing of fungible, collateralized baskets of tokenized assets. Users who desire to track an index or have their portfolios automatically updated based on a trading strategy can subscribe to a Rebalancing Set. The protocol is open, non-rent seeking, and aims to utilize decentralized governance. I loved the idea of Set being an ERC20 token (compliant with ETH basis).
With Set came a slew of new innovations that I thought were revolutionary in the Blockchain space. Set tokens are able to be collateralized by their underlying token components. This means that the Set trustlessly has custody of the components and can only be accessed through its exposed methods. Sets can be redeemed or traded for their components. As Sets are backed by the underlying tokens, users can be certain that their Set can be traded for their components. Set tokens could save gas by only paying a single time fee, future possibility for multi-layer abstraction, underlying value and no counterparty risk. Set can be used for investment, tracking, rebalancing, and for/with advanced derivatives. Set to this day is continually innovating with potential future uses including a composite stablecoin, protocol collateral, hedged bet, and fractional/partial ownership of non-fungible assets.
Set is only a part of the puzzle. These innovative techniques of creating interacting markets off of an underlying basis is what makes me personally very bullish about the future of DeFi and other ERC20s. Mitigating price slippage for price stability, on-chain price oracles, and even collateralized debt issuances via the DAI Token from MakerDAO all are reasons for me to believe that there might be an even expansive definition of financial markets and their capabilities via crypto. While Blockchain is known at its most fundamental as a decentralized distributed ledger with anonymous and security protocols built into its Proof of Work, DeFi tokens are more than just the future of Blockchain systems but also the future of trading, financial acumen, and the economy at large scale.
