So the fourth module in DeFi Deep Dive has to do with tokenization. And indeed we're going to talk about not just tokenization but tokenization of tokenization. So this is it's really interesting that there is a protocol called set and for a person that's involved in asset management and this is like really attractive and innovative. So I'm excited about this protocol and let's dive in. So, tokenization in general refers to taking an asset or a bundle of assets or portfolio. And this could be on chain, so it could be something that's purely virtual, it could be off chain also. So it might be gold, which needs to be physically a stored but you can tokenize it and it has been tokenized already with the ERC-20 tokens. Okay, so the idea, one of the visions that I have is almost everything in the future will be tokenized. We're just seeing the very beginning of this. So again these tokens could represent an asset and the asset beyond chain or off chain, it could be fractional ownership. And it's also possible to have a compass a token that holds a number of other tokens. Okay, so a token of tokens somewhat analogous and traditional finance, where you can buy individual stocks or you could buy a mutual fund or an ETF that holds a portfolio of those stocks. Okay, so somewhat similar idea. So again, bring a look at ERC-20 tokens and I will talk a little later on in terms of all of the different ERC protocols but for now we'll talk about the ERC 20. And most of the tokens that we've talked about our ERC-20. Okay so tokenization very important concept. We've talked about the 20 which is kind of the standard of fungible token. So one year ERC-20 is exactly so one di equals another die. They're fungible. The 721 we've also talked about to some degree that is the nonfungible token sometimes called the deed because it gives you ownership of something. And those are our unique and nonfungible and many different applications we talked previously about. It could be fine art, it could be something in a game, it could be music, it could be a video, there's just no limit to this. So DeFi obviously takes advantage of these ERCs. And there's a long list of the ERCs but the key thing is that it's so easy for them to enter operate. So that said on tokenization, what is set going to do? So this is a protocol that establishes a standard for tokenized baskets. Okay so this is a protocol that establishes think of it as a composite token and you can decide what the composite actually is. So we're going to use Ethereum based tokens. So ERC-20 tokens and effectively have a protocol to put them together and you can think of it roughly as in traditional finance an exchange traded fund. Okay, so the Set Protocol combines them and they're actually called Sets. So the Set of tokens is also an ERC-20 token and basically it is going to be fully collateralized which is easy to do. In terms of using assets that are ERC-20 or Ethereum and again we're creating something that is a composite. So there are at least two types of Sets. And the first Set is kind of like a mutual fund are passive mutual fund. So a Static Set is is basically a fixed bundle of tokens. Okay, so it might be that you create a portfolio of ERC-20 tokens and then somebody basically does that they've got a composite token that represents that portfolio and then you can invest in that. Much like there could be an ETF that buys all of the stocks or the S and p 500 stocks and just holds those stocks. And then you could buy that ETF and then buying that ETF you don't need to go and buy the 500 stocks. So indeed you might not have enough money to actually buy round lots of those stocks. Okay, so you buy the ETF and you pay the fees that are associated with that ETF. Well with the Static Set, it's kind of the same idea, you're buying a composite token and the composite depending upon the Set has got a number of components that are static. So the best way to think about this is like the passive ETF. There's nothing active going on here, it's passive. So again this is a a number of these are offered and I've just got an example here of DeFi Pulse Index. And this is a Static Set of DeFi tokens. And it's actually got 14 tokens in this DeFi index. And I show you here the top two are UNI which is the the token for the governance token for uniswap and AAVE which is both above 20%. And they've got 12 more tokens and you can see the maker right there. That M so the full list is available but you can see that the capitalization of this index is 143 million. Okay, so this is a compass a token that if you want to buy a diversified portfolio of DeFi tokens, you can buy this particular Static Set. Very nice idea. Rather than worrying about the portfolio of 14. Okay, what about a dynamic set? So this is particularly interesting to me, given my interest in active as a management. So a dynamic set defines a trading strategy. And there's a number of ways to actually do this. But it could be a very simple rule, like a moving average. So the set defines the investment to be either 100% ETH or 100% USDC. Whenever the moving average crosses the X-day, simple or exponentially weighted moving average. So it's a trading rule that's implemented in this set. Okay, so this is very interesting. It's the first product that I've seen anything like in the defy space. So it is analogous to an active hedge fund or a mutual fund. It is a little different in that the actual rule is visible, right? So you're buying this moving average rule, so you're buying into this particular trading strategy. The other thing is kind of interesting is that you can set this up and earn a fee. Okay, so very much like an asset manager is paid a fee. And for mutual funds and ETF, so it's usually just a fixed fee that you pay, but in the hedge fund space there's often performance fees. So in addition to the fixed fee, which who knows what it is, it could be 10 basis points, it could be 100 basis points. But the performance fee that depends on how much you actually make. So it might be if the return is let's say 10%, then you might take 25% of that 10 or 2.5%. So again, that's just a choice and you could set this up and people see exactly what the rules are, and they make a decision as to whether they want to participate. So it might be that I've got a protocol that says that there is going to be a fee of 100 basis points a year, that's fixed. And there might be a performance fee and somebody else has got something that's cheaper and the market decides. If I'm too expensive, then I'm not going to get any business. So, again, it's a really fascinating idea. So again, I've just sketched the outline of the possibilities here. So like mutual funds, you can have a front end load or a fee to get in. You can have this fixed fee, that's the parlance of traditional finance, but it's more in defy a streaming fee. So because if it was just done once a year, people would just dump it the day before the end of the year. So it's a streaming fee and also a performance fee. It's interesting the protocol isn't really taking fees at this time, but maybe in the future it will. So the protocol, so if you actually set up a set, so if I set up a trading strategy, I can determine whatever fee that I get. Okay so that is just completely up to me and it's up to people participating. If they believe that I've got some skill or maybe they've seen my track record, maybe they've read my book and they want to allocate towards what I'm actually doing. So this is quite a powerful idea, and this is just an example of, this is called The Quant. It is a dynamic set that uses machine learning techniques, and it's balancing between Bitcoin and a Stablecoin. And you can see the allocation at this particular point in time is 95% in Bitcoin and only roughly 5% in in the Stablecoin. But this is an active program that could actually switch from Bitcoin to the Stablecoin based upon the machine learning signals. So notice when I say Bitcoin that might be a little confusing because this is all on Ethereum and Bitcoin is not listed on Ethereum. But take a look and you can see that it says USDC for the US Dollar, but it says WBTC, which is wrapped Bitcoin, which is available on Ethereum. And we're going to talk about that. So this is just an example of an active set. So of course there is an oracle that is necessary for the price feeds for this. Okay, so there needs to be some information that comes in to determine the trades. It is interesting also that you've got public view of the actual trading strategies. If it is algorithmic, it doesn't necessarily have to be visible. So if you've got a dynamic set, people for example and what I just showed, don't necessarily have access to the machine learning tools. So there is some discretionary nature to the dynamic sets. So set has also got the possibility of something called social trading. So basically a user can purchase a set portfolio that's restricted to certain assets controlled by single trader. So I like a particular trader and I buy like a set that effectively follows that trader. And here it is kind of different than what we've talked about before because the trader is just doing what they're doing. Right, so it's not visible, they've got their own model, but you can actually buy in to what they're doing. And that's just an incredible idea in my opinion. So this allows us to Kind of invest in these potentially very sophisticated strategies that are only available today to certain hedge funds. But you can actually participate, anybody can participate. You can essentially follow that portfolio manager and profit when that portfolio manager does well. So it's very interesting idea. So, let me give you an example and it's a simple example, but I just want to emphasize the power of this particular protocol. So, we've got a portfolio manager for Set and basically the usual thing that we want to do in finance, want to buy low and sell high, okay? So that's the key idea. And there are only two assets ETH and USDC. And there's only two allocations that are allowed 100% or 0%. So it's a very simple example, but it shows you kind of the idea, that I described the possibility of having a moving average rule that's visible to anybody. And if you cross the moving average, then you're 100% ETH, and if you're below then you're 100% USDC. This is different. So, this portfolio manager for a Set, they can do what they want as long as it's 100% ETH or 100% USDC. So it's up to their discretion. So maybe they've got much more sophisticated model than the moving average, and they're not going to reveal it. But you've got a chance to actually participate, and indeed when you do that you're injecting capital, injecting liquidity to support that particular trader, okay? So this is again, has got very strong restrictions as to what you can do that are visible to everybody, but the actual allocation is a discretionary allocation that isn't necessarily visible in the particular a Set. So again, it's very interesting for asset management. So let's continue this example, suppose our Set portfolio manager, she starts with 1000 USDC and the price of ETH drops to 100, and she decides to buy. Okay, so a rebalance is triggered in the protocol. So this is something that the trader has got control over. And then the 1,000 USDC become 10 ETH. Okay, remember the rule that is either 100% USDC or 100% ETH. So now suppose that the price of ETH doubles to 200, the portfolio that started being worth 1,000 is now worth 2,000. So if you own 10% of that Set, then you could redeem for either one ETH or 200 USDC, okay? And you've doubled your money also. Now this abstracts from all the fees, but you get the idea of how this could actually work. Okay, so, I'm particularly excited about this protocol because it effectively democratizes wealth management, and wealth management is very undemocratic right now. So, I don't have access to hedge fund investments, most of us don't have access. So if you're a high net worth individual, you've got access. If you're a large pension plan or something like that, sovereign wealth fund, you've got access. But most of us don't have access to these very attractive investments. But with this protocol in the future I see the possibility that very sophisticated investment products can be offered on Set and they are available to anybody. Now, of course, and we'll talk about this in the fourth course, there's regulatory risk here. So these are like securities. So that is an issue that is a particularly important issue in the US. Even though I talk about the US a lot, I'm based in the US on a Green Card, but this course is not just about the United States. So DeFi is not a United States phenomena, it's a world phenomenon. So, again, this protocol extremely interesting because the sort of assets, we've talked about ETH and USDC. But we could use all of these other tokens that we've talked about, like the compound tokens, that ERC20 were ready to go. Okay, so there's many possibilities here. And this is again, another good example of the DeFi Legos. So in terms of overall here, I think the main thing here is access for Set protocol, that now it's possible for anybody to become a fund manager, okay? So I could become a fund manager with a Set protocol set. So it's also possible for anyone to invest in a strategy that in the past was limited to high net worth individuals. Everything is tokenized, everything is interoperable. And for the Sets that are static, you see everything. For some of the Sets that are dynamic you also see everything, because it could be an algorithmic trading role. But there's also the possibility that you're just investing in somebody. So that's this idea of social investing, that somebody with a reputation and Set allows us to do that.
