Overview
Set Protocol is a non-custodial protocol for creating, managing, and trading tokenized portfolios on Ethereum. Rather than offering consumer products directly, Set provides the smart contract infrastructure that other projects use to build structured products — most notably Index Coop, which uses Set's framework to power DPI, ETH2x-FLI, and other index tokens.
The protocol has evolved through multiple versions:
- Set V1 (2019): Basic tokenized baskets with manual rebalancing
- Set V2 (2020): Modular architecture with automated strategies, external integrations, and the framework that powers Index Coop's products
- TokenSets: A consumer-facing product built on Set V2 allowing users to create and follow trading strategies (social trading for crypto portfolios)
Set Protocol's core value proposition is enabling permissionless creation of tokenized financial products. Any developer or DAO can deploy a Set that represents a basket of tokens with custom allocation, rebalancing, and fee logic. This infrastructure approach means Set's success is measured not by its own TVL but by the aggregate TVL of products built on its platform.
Smart Contracts
Set Protocol V2's smart contracts represent some of the most sophisticated and well-audited DeFi infrastructure. The modular architecture separates core token basket management from strategy modules, integration adapters, and fee logic. This separation of concerns allows new strategies and integrations to be added without modifying core contracts. The contracts have been audited by Trail of Bits, OpenZeppelin, ABDK, and others — among the most thorough audit programs in DeFi. The codebase has operated for years, powering hundreds of millions in AUM, without major security incidents.
Security
Set Protocol's security record is excellent. Years of operation across multiple market cycles — including extreme volatility events — without major exploits or loss of user funds. The modular architecture limits blast radius: a vulnerability in one strategy module wouldn't compromise core token management. The protocol's integration with Aave, Compound, and other DeFi primitives introduces composability risk, but Set's adapters are carefully designed with appropriate safety checks. Set V2 is one of the most battle-tested pieces of DeFi infrastructure.
Yield Generation
Set Protocol enables yield generation through strategy modules that automatically deploy underlying assets into yield-generating activities. Products like dsETH (diversified staked ETH) generate staking yield, leveraged products generate amplified returns, and custom strategies can implement any yield logic the module supports. The protocol itself doesn't generate yield — it enables yield generation for products built on it. The quality and magnitude of yield depend on the specific product implementation rather than Set Protocol's infrastructure.
Adoption
Set Protocol's adoption is measured through the products built on its infrastructure. Index Coop (DPI, MVI, FLI products) represents the largest user of Set V2, with aggregate AUM that has ranged from tens of millions to several hundred million depending on market conditions. Other products have been built on Set, including Galleon DAO's products and various community-created strategies. The TokenSets social trading platform attracted users during bull markets but saw declining engagement during bears. Set's adoption is substantial for DeFi infrastructure but concentrated in Index Coop products.
Tokenomics
Set Protocol does not have a widely traded governance token in the traditional sense. The protocol's value capture is through fees charged to product creators and streaming fees on Sets. This creates a challenge for investors seeking direct exposure to Set Protocol's success — the most direct route is through INDEX (Index Coop's token) rather than Set itself. The lack of a liquid, investable token with strong value accrual is the primary tokenomics weakness, though it may be intentional as Set positions itself more as infrastructure than a token project.
Risk Factors
- Concentration in Index Coop: Majority of Set-based AUM flows through one project
- Cyclical AUM: Structured product demand drops significantly in bear markets
- Limited direct investment exposure: No strong investable token for Set Protocol itself
- Composability risk: Products depend on external protocol integrations (Aave, Compound)
- Infrastructure competition: Balancer and others increasingly support similar structured products
- Regulatory risk: Tokenized structured products may face securities classification
- Market risk: AUM drawdowns during bear markets reduce protocol revenue
Conclusion
Set Protocol is foundational DeFi infrastructure — the smart contract platform that makes on-chain index products possible. The 5.7 score reflects exceptional technical quality, the strongest security record in the tokenized portfolio space, and meaningful adoption through Index Coop and other builders. The score is moderated by the lack of a strong investable token, concentration risk in Index Coop as the primary product builder, and cyclical AUM patterns. Set Protocol is to DeFi structured products what AWS is to web applications — essential infrastructure that enables the ecosystem but doesn't always capture proportional value. For the DeFi space to mature, infrastructure like Set Protocol is essential, even if the token economics don't match the infrastructure's importance.