Set Protocol has quickly become one of the most talked-about DeFi projects in the space. Set provides a medium to partake in sophisticated trading strategies by purchasing a single ERC token. For those unfamiliar with the project and looking to learn more, we encourage you to check out an overview here. Set Protocol has released an important milestone for Set with the introduction of the Rebalancing Dashboard, a consumer-facing tool for anyone to take place in Set rebalances.
“When the state of a Set transitions into the “Rebalance” phase, Set Protocol’s smart contracts kick off a modified dutch auction. In this open auction, components from the previous allocation are exchanged for the components in the new allocation (e.g. ETH is auctioned off for USDC).”
These auctions provide a mechanism for traders to take advantage of arbitrage opportunities on the price of ETH in the auction versus the price of ETH on the open market. Furthermore, rebalancing becomes an even more community-oriented event, thus mitigating slippage and ensuring that all sets are properly collateralized at any given time.
How Does it Work?
Set Rebalances are a modified form of a dutch auction, otherwise known as an auction in which an asset (in this case ETH) is offering at a high ask price and gradually decreased over time until a buyer agrees to a fair value.
“With Set Rebalances, price (or the ratio between inflow tokens and outflow tokens) follows a predefined price curve which starts off high and goes down every block (currently every ~13 seconds). At a certain point the auction will pass fair value and there is a spread between the cost of acquiring the injected components and the received components.”
Better yet, these auctions differs from traditional dutch auctions in that bids settle immediately with no cap, meaning that bidders receive the outflows tokens automatically, with the auction running until all inflow tokens are matched. Seeing as the funds are never locked in the contract, this form of auction eliminates front running and reduces gas costs.
Seeing as each Set has a different makeup, the auctions follow different parameters including:
- Auction start price: this is the price ratio at which the auction starts as determined by MakerDAO’s price feeds.
- Price step: The price ratio updates slightly every block.
- Minimum bid size: The minimum amount of units of outflows that can be bid at one time (this is fractions of a cent).
To start bidding, make sure you have some Wrapped Ether (which can easily be acquired on Eth2Dai or Radar Relay). Head over to the rebalancing dashboard and wait until the auction lists the assets as the price you think is fair. Submit a transaction and if you’ve placed it at a price that the auction reaches, your inflow (WETH) will be sold for outflow (USDC).
Why Should I Care?
As mentioned in our introduction, participating in Set Rebalances is a great way to acquire ETH (or any rebalanced asset) for better than market value. This dashboard marks the first consumer-facing process for participating in these auctions, thus further distributing the Set platform as a whole.
As Set continues to take strides towards becoming fully decentralized, dashboards such as this mark an important milestone in the inclusion of non-technical users. This means that trust can be removed from a central entity (Set Labs) and more towards the community at large. While Set Labs will always play a role in the participation of TokenSets, community members such as yourself are continuing to have a bigger and bigger role in how DeFi platforms operate.
Since it’s launch just a few months back, Set Protocol has currently captured over $2.8M in Total Locked Value according to DeFi Pulse. Along with the introduction of numerous new trading strategies and TokenSets, it’s evident that the core team at Set Labs is exceeding expectations each week.
For those looking to stay up to date on all new things surrounding Set, we encourage you to join the official Telegram (currently invite-only, please message me on Telegram @coopahtroopanew to be added) or to subscribe to the official blog. We hope to see you at the rebalancing auctions!
Cooper is the Editor of DeFi Rate. He is an ambassador of Set Protocol and an active contributor to MetaCartel where he seeks to find emerging consumer-facing applications that propel the Ethereum ecosystem. He often works with projects as the Director of Fitzner Blockchain Consulting where he coauthors the weekly publication Token Tuesdays.
Like my writing? Drop me some gwei @ coopahtroopa.eth 😉