This post was last updated on May 4th, 2020 at 08:00 pm
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Quotes“@SetProtocol is an #ethereum-based protocol for automated trading. It’s the underlying infrastructure. @tokensets is the first product built on top of Set.” ~@felix2feng, co-founder & CEO at Set Click To Tweet “@SetProtocol inherits all the benefits of #DeFi. It's accessible, it's 24/7, it's global, it's permissionless, and every trade & transaction can be tracked on #blockchain.” ~@felix2feng, co-founder & CEO at Set Click To Tweet “The entire financial system needs to be rebuilt. It needs to be global, internet first, and it needs to be inclusive. That's what we're trying to achieve with #DeFi.” ~@felix2feng, co-founder & CEO @SetProtocol Click To Tweet
Welcome to this conversation with Felix Feng, co-founder and CEO of Set, the company behind Set Protocol and TokenSets, an Ethereum-based platform that lets users invest in crypto via automated “Robo” strategies or social trading strategies authored by experienced human traders. All are sortable by performance, which, in some cases, has been exceptional.
The conversation is split into 4 chapters:
- Chapter 1: Set Protocol and TokenSets
- Chapter 2: A quick history of social trading
- Chapter 3: How to get started with TokenSets
- Chapter 4: Set’s operations and plans for the future
Topics Discussed In This Episode
- How Felix first got into Bitcoin back in 2013
- Learning Solidity at ConsenSys Academy
- How Felix architected Set on the flight to ETHWaterloo
- The difference between Set Protocol and TokenSets
- The explosive growth of decentralized finance or DeFi
- The technology that powers TokenSets
- Two types of sets: Robo Sets and Social Trading Sets
- How traders update sets and initiate rebalancing
- How Set facilitates rebalancing through Dutch auctions
- The history of social trading and why some consider it the future of finance
- How to get started with TokenSets, step by step
- Set as an alternative to setting up a hedge fund
- Set’s plans to add new trading strategies, assets, and long and short tokens
Links Relevant To This Episode
- Nomics’ Fully Customizable Daily Crypto Newsletter
- Clay Collins
- Felix Feng
- James Poole
- Bitcoin (BTC)
- Paul Veradittakit
- Civic (CVC)
- Filecoin (FIL)
- Ethereum (ETH)
- 0x (ZRX)
- Kyber Network
- ConsenSys Academy
- Turing Capital
- Bitwise Asset Management
- Maker (MKR)
- Dai (DAI)
- USD Coin (USDC)
- Compound USD Coin (CUSDC)
- Compound Dai (CDAI)
- Wrapped Bitcoin (WBTC)
- Chainlink (LINK)
- Wrapped ETH (WETH)
- Dentacoin (DCN)
Clay: Welcome to Flippening, the first and original podcast for full-time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.
Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do not reflect [00:00:30] the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
Clay: Welcome to this conversation with Felix Feng, co-founder and CEO of Set, which makes TokensSets.com and governs the Set Protocol. I’ve been following TokenSets and the Set Protocol for about a year, but I really started diving in a few weeks ago after reading a tweet from James Poole, who’s the CTO at TokenSoft and also a Nomics investor and Nomics API user. Anyway, James wrote on his twitter feed that TokenSets was his favorite DeFi project. Thanks to James for inspiring this interview. TokenSets is certainly my top three DeFi project at the moment.
Starting in April 2019, TokenSets lets users invest in crypto assets via automated “robo” strategies or social trading strategies authored by experienced human traders. All are sortable by performance, which [00:01:30] in some cases has been exceptional. I believe that TokenSets is one of the most exciting projects in DeFi right now.
Our conversation is split into four chapters. Chapter one is an overview of the Set Protocol and tokensets.com. Chapter two is a quick history of social trading. In chapter three, we’ll learn how to get started with TokenSets, both as a user and as a Social Trading Set creator—taking fees and hopefully earning money for the people who invest in your set. Finally, [00:02:00] in chapter four, we’ll cover operations at Set and the company’s plans for the future.
The transcript and show notes for this episode are available at flippening.com/set. We’ll get to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the good folks at CryptoTrader.Tax. Here are four things you should know about them.
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Okay, back to our regularly scheduled program. Here’s my conversation with Felix Feng, co-founder and CEO of Set Protocol. Enjoy. [00:06:00]
Clay: I’d love to hear a little bit about your background prior to Set Protocol. What were you up to and how did you fall down the crypto rabbit hole?
Felix: I was born and raised in the bay area. I went to school at UC Berkeley. During my last year there in 2013, my friend was trading and mining bitcoin at the time. This was a period of time when bitcoin went from $100-$1300. [00:06:30] I became very curious and bought $1000 of bitcoin on Coinbase, and I probably sold it for $10 a profit. In 2014, I studied abroad in Milan. As I got deeper into the crypto rabbit hole, I decided to attend Bitcoin 2014, which was the annual bitcoin conference at the time.
I got to see a number of the technical presentations by the core developers. [00:07:00] I saw early-stage companies such as Coinbase and met some influential leaders like Charlie Lee at the time. I left that event thinking, “Wow. The technology underlying bitcoin is going to transform the finance and legal industries the same way that the internet did for media and communication.”
After that, I started buying bitcoin, and it was when bitcoin was around $600. Over the course of the next year and months, it actually went down to [00:07:30] a low of $150. I was thinking to myself, “What am I doing in my life buying bitcoin and being down 75% or 80%?” This is something I kept at. After I graduated, I worked in finance. In 2015, I reached out to Paul V. at Pantera Capital, and he took a meeting with me because there wasn’t really that much happening in crypto—the space—at the time.
I had a coffee with him, and I wanted to do whatever I could to contribute. [00:08:00] I ended up helping him look at early-stage companies at the time. It was mostly exchanges, wallets, but we saw some interesting companies like Civic, Brave. I met Juan Benet when he was still pitching IPFS before it was Filecoin.
Clay: Very cool.
Felix: I helped some of the portfolio companies at the time. I realized that I was spending a lot of my free time and my money in crypto. Really, the next natural step was to spend all my time. In 2015, I was looking to join a [00:08:30] crypto company, and there were two well-funded ones in the Silicon Valley at the time. There was Coinbase and there was 21. I ended up joining 21, which was a bitcoin mining company.
It had built one of the first A6 in the industry and had about 2% of the mining network. Due to increased competition of mining—particularly in China—and decreasing asset prices of crypto, I helped them make that transition from running mining operations in US-based data centers [00:09:00] to pivoting to 21 bitcoin computer or a Raspberry Pi developer product to Earn, which is a paid email service. I saw all of that.
Afterward, it was 2016 and crypto was a little bit a boon to be in. Most people were focusing on the scaling debates, and it didn’t seem like much progress was being made. I took a hiatus from the industry and worked at a machine learning startup [00:09:30] as a software engineer, but in 2017, Paul came and told me, “Hey, you need to pay attention to this thing called Ethereum.”
I was mostly a bitcoin maximalist at the time, so I wasn’t paying attention to the basic technology, but when I looked at the white paper, I looked at all the development that was happening and the community around it, I became bought in. That was when I started converting some of my bitcoin to ethers when ether was about $70.
I vividly [00:10:00] remember doing that conversion on a Friday, and over the course of that weekend, it went from $70 to $150. That marked the beginning of the bull market.
Clay: When you refer to Paul, is that Paul Veradittakit?
Clay: Yeah. Okay. At Pantera. Okay. Very cool.
Felix: That bit marked the beginning of the bull market. I was fascinated by all the new ideas and projects coming out. I had been investing in these projects through the ICOs as well. The ones that were the most fascinating to me were really the ones around [00:10:30] decentralized trading and decentralized exchanges, so the 0xs, the Kybers, the AirSwaps of the world. I ended up starting an angel syndicate called [inaudible 00:08:48] Capital with a number of other investors and entrepreneurs. We sourced and did a number of deals together.
Along the way, I was also learning Solidity. I ended up attending ConsenSys Academy, which was in its first cohort where they had 1500 applicants, they [00:11:00] whittled it down to 150, and those people got to learn Solidity in a very structured manner. I was one of the beneficiaries of it.
Along the way, I actually went and attended ETHWaterloo, which is the first Ethereum Hackathon. I was originally planning to join a team that was working on web 3.0 and TypeScript. On the plane ride there, I was thinking about what was missing. I was very fascinated about the decentralized exchange technology. What really opened my mind was after I read [00:11:30] Antonio’s dYdX white paper. It helped me realize that you can build sophisticated financial products using smart contracts.
I thought about what was missing in this space and realized that no one was really building a fully decentralized index fund. There had been some other things like Prism, ShapeShift, there was Bitwise, but there wasn’t anything fully decentralized. I architected how to build that on a plane ride over and by the time I landed, I was so compelled by the idea that I [00:12:00] ended up ditching my team and working on what became Set.
Over that weekend, I ended up presenting to folks like Joe Lubin, Will Warren of 0x, Linda Shay. They thought it was a really cool idea. I ended up presenting to ConsenSys in a more formal setting where I presented to Joe and Jeremy Miller. They actually considered giving me an EAR or entrepreneur and residence role to work on this project.
I ended up turning them down, but eventually, [00:12:30] I started getting all my friends involved. I created a GitHub, and a Slack, and we started hacking, and developing Set. Eventually, we raised a seed round in March of 2018, from some really great Silicon Valley investors including Craft Ventures, VY Capital, DFJ among others, and we’ve been building out Set since.
Clay: Let’s transition to chapter one, which is an overview [00:13:30] of what the Set Protocol is and also what Token Sets is. Before we get too far into this, can you help us just differentiate between Set Protocol and Token Sets? I know that they’re related, I know how they’re related, but would love to hear it expressed by you in a way that the layman could understand.
Felix: In general, we are focused on essentially helping users implement some sort of [00:14:00] portfolio management strategy. Right now, of the $200 billion in market cap in crypto, about 60% or $120 billion of that is held by retail investors. Most of them do not implement some sort of portfolio management strategy, and as a result, they have missed out on billions of dollars of opportunity, or have experienced billions of dollars of losses, particularly when the crypto cycles are so volatile.
What we’ve built at Set is an Ethereum-based protocol for automated trading. [00:14:30] This protocol is a Set of smart contracts that is intended to be utilized by developers, by financial institutions, by exchanges, and by other folks who want to build services for the end-user, which is the investor or the trader. Set Protocol is that underlying infrastructure, and TokenSets is the first product that is built on top of the protocol.
Just to give you a little bit of overview of the [00:15:00] protocol itself, what we’ve enabled is essentially the creation of a trading strategy that is tokenized. Each is represented as an ERC20 token. It is similar to an ETF in that it can be listed on an exchange. You can trade it in your wallet. It also has the creation and redemption mechanisms that are similar to an ETF product.
That means that every single Set is fully collateralized, which means that everything that the Set represents—which is this abstract token—is held in a smart contract called [00:15:30] a vault. In addition to that, these Sets can be periodically rebalanced based on some sort of pre-defined rules or through the discretion of a third party. These rebalancing acts happen through a Dutch auction, which is an auction where the price starts high and goes down over time.
Finally, this protocol inherits all the benefits of DeFi, which is that it’s accessible, it’s 24/7, it’s global, it’s permission-less and available to everyone in the [00:16:00] world, it’s transparent—like every single trade and transaction can be tracked on the blockchain—and it’s interoperable, which means this protocol serves as a building block, in which other people can build on top of. It’s totally open source and auditable, whereas traditional financial services may be a closed or walled garden, if you will.
Like I mentioned, TokenSets is really the first product that is built on top of Set. We have two types of products. We have, essentially, the Robo Sets and the Social Trading Sets. That’s [00:16:30] what we built today, and that’s how most people understand the ecosystem today is through this product called Token Sets.
Clay: Let’s talk a little bit about underlying technologies. It was interesting to hear that you started playing around with bitcoin. That was your entry into this space. Paul came by and said, “Hey, you should check out Ethereum.” You were investing prior to Ethereum, but you weren’t building prior to Ethereum. That’s something that I’ve heard, [00:17:00] quite a bit.
That smart intelligent people who have had a desire to create in this space, enjoyed a lot of the theories and concepts behind bitcoin, but they really didn’t start flexing their creative muscles and building until they found Ethereum because I guess, the community, the opportunity, the abilities that smart contracts or the opportunities that smart contracts open up just engendered creativity inside of them and got them to build when they weren’t before. Do you think you’d be [00:17:30] a builder in this space if it weren’t for Ethereum?
Felix: For me, the technology underlying crypto always felt like it was something that we could build upon to reinvent the existing financial system. I see that the existing financial system is extremely broken and archaic. We live in a world that is 24/7, that’s global, and that’s powered by the internet. We can interact with anybody through a text message and someone on the other side can interact with us directly as well.
[00:18:00] The information around the world is accessible by all. That really isn’t how the financial system is today despite the internet. We have some fintech companies like Stripe, Plaid, PayPal, and what they’ve really done is build on the existing broken rails, which are 9:00 to 5:00, Monday to Friday. They’re expensive and slow, and just applied a layer of lipstick on a pig, if you will.
We think that’s not the way the future is going to be. Instead, what we believe is that [00:18:30] the entire financial system needs to get rebuilt from the bottom up like from first principals. It needs to be global, internet first. It needs to be inclusive of everybody. That’s really what we’re trying to achieve with DeFi. Bitcoin, as I see it, is the first piece of technology that demonstrates that you could have money that has all these properties, right? 24/7, global, available to everyone in the world.
What DeFi and decentralized finance is really extending [00:19:00] that to be able to do more. Instead of just holding a currency and transacting it, you should be able to lend it. You should be able to borrow. You should be able to trade derivatives. You should be able to swap with somebody else. You should be able to implement some sort of asset management strategy. What we are finding—on Ethereum at least—is that a lot of this underlying infrastructure is getting created and built. This is uniquely enabled by a smart contract platform [00:19:30] in which Ethereum has really pioneered and invented it.
With bitcoin, it just has been too limiting with the scripting language to be able to offer the breadth and the ease of development for someone to build something. Ethereum has really proven that out, and as a result, we saw very primitive technologies like MakerDao get built on top of it. Now we’ve seen money markets like Compound. We’ve seen Derivative products like dYdX come out.
We have an explosion [00:20:00] of activity that’s happening in DeFi, and this is happening extremely quickly. This is open source so we’re seeing an immense amount of remixing happening. For example, there are a dozen different versions of Dai today. There’s rDai, there’s yDai, there’s aDai, and people are taking these technologies, adding their own little twist on top of it. We’re seeing more innovation on DeFi now—in terms of financial products—than we have ever seen in a while in the traditional markets. [00:20:30]
The dynamic that we really see at play here is the innovator’s dilemma where most traditional institutions and most traditional investors are used to value propositions and a feature Set that the currently existing system is able to provide. DeFi’s feature Set is very limited and doesn’t really meet the needs of the sophisticated user. What we’re seeing is that the improvement of DeFi is happening exponentially. [00:21:00] DeFi wasn’t even live a year and a half ago, but it’s made so much progress and has recently hit $1 billion dollars in total assets launched.
Over time, as we see these improvements because of the open-source nature of this technology, things are going to move extremely quickly, and at some point, we’re going to hit parity with existing financial products. After that, our products will be order magnitude better than what exists today.
That’s what I see shifting over time. [00:21:30] We will need to make improvements in the underlying infrastructure. Ethereum does need to scale. We’re going to need to make the onboarding process a lot easier, a lot more seamless. We’re going to need to add more assets onto Ethereum, but these are things that are going to be improved incessantly. We’re just taking one step, one foot in front of the other.
Clay: One of the things that got me really delving into what you’re doing at TokenSets is a tweet that I saw from James Poole who’s [00:22:00] the co-founder of TokenSoft. He sent out a tweet that said, “I think TokenSets is my favorite DeFi project right now.” Then he refers to ETHMACOAPY, which basically works like this. If the ETH price goes below the 20-day moving average, it rebalances funds into CUSDC so you can get a yield.
If the ETH price is above the average, it rebalances into ETH. That’s a pretty cool strategy, and it looks like it’s one that’s been working. Let’s touch on underlying technologies a little [00:22:30] bit. What is absolutely required for the Set Protocol to work? Obviously, Ethereum is required. Is Dai required? Can you just walk us through the tech stack that’s required to make Set Protocol work?
Felix: The Moving Average Crossover Set has been quite popular and performing really well. Most of the users who have been holding it are quite happy to have multiplied their [00:23:00] ether. In terms of the underlying technology that powers TokenSets, the first thing is just the underlying assets that are available. Each asset that is included in the Set needs to be an ERC20 token. Some of these that we have today are wrapped Ether, DAI, USDC, compound versions of Dai and USDC, so CUSDC and CDAI. We’ve included wrapped Bitcoin, which is an ERC20 representation of Bitcoin that is backed one-to-one [00:23:30] in a custodian wallet. We’ve also added Link as well.
Firstly, the tokens need to exist. In addition to that, we need tokens that are liquid on Ethereum. They need to be supported by some sort of market maker or liquidity pool. Ideally, the underlying assets are listed on something like Kyber Network, Uniswap, or traded widely on a 0x exchange. There are a number of sophisticated market makers that can provide the liquidity [00:24:00] underlying these tokens.
In addition to that, to implement the strategies and to implement our Dutch auction as we described earlier, we do need oracle fees or prices for these assets. For Bitcoin and Ether, we actually work with MakerDAO to utilize their price oracles. For the LINK-USD pricing, we have worked with Chainlink to provide the LINK-USD price. For other oracles like the [00:24:30] compound token, we actually build our own oracles—what we call meta oracles—on top.
We’ll take the underlying price, and then get the exchange rate on the Compound smart contract and automatically compute the price of the C token. Another thing that’s interesting that we built to power some of our strategies are essentially what we call these meta oracles. For example, we need to compute information such as moving average. [00:25:00] What we need to do is to attract the price of Ether on a 24-hour cadence. We have our own smart contract system that will track these prices and track a history of daily price movements. Then we can compute the moving average using that.
The possibilities are really limitless. We can combine these different indicators to create sophisticated strategies that power the [00:25:30] Robo Sets today. To summarize, a few things that we need are, one, we need the underlying tokens, and we need them to be liquid, we need oracles as well. That’s really all the dependencies that we need that power the system today.
Clay: Let’s dive a little bit deeper then on introducing TokenSets. It looks like you’ve got a number of sets that are able to be created, there are Robot Sets, there are Social Trading Sets, there are sets based [00:26:00] on the activities of individual traders. Can you just give us a rundown of the various types of sets that exist and how they work? Maybe starting off with Robo Sets?
Felix: There are really two categories of sets today. The Robo Sets are sets that are proprietary and have been created by the Set Protocol team. Some of these strategies are simple like the index strategy. We have a few Sets, for example, where if you want to maintain [00:26:30] a 50% allocation of wrapped Bitcoin and a 50% allocation of wrapped Ether, you’re going to have that periodically rebalance, let’s say, on a monthly cadence.
We have some other more sophisticated strategies where the rules of how the strategies are executed are predefined in smart contracts. These are strategies that we have typically back-tested, we have developed, we have deployed, maintained, and marketed to the [00:27:00] general public. One type of strategy is what we call the technical analysis strategy, which is using these indicators—like the moving average—to make a trade.
As you described before, a moving average strategy works as follows, which is if the current Ether price goes above the moving average or the indicator, then you may rebalance or trade into Ether. If it goes below that, it would go against it. It turns out that these strategies work extremely well in trending or volatile [00:27:30] markets. That’s exactly what crypto is, is you have frequent bull and bear markets where you can take advantage of these opportunities.
Ironically, most people in the industry believe that you should just hold or huddle your crypto, but if you’ve huddled long enough, what I’ve realized is that there are significant times when crypto is overbought, and there are many times where it’s oversold. Most people are kicking themselves thinking like, “Wow, I should be smart enough to be able to take advantage of these opportunities.”
[00:28:00] Most people can’t because they either don’t have access to some crypto hedge fund that they can put their money in, or they’re not sophisticated enough to do it themselves. It requires technical knowledge, requires time and effort, which is really hard because crypto is 24/7 if you were to do it manually. Really, the Robo Sets help automate this for the end-user.
Like I mentioned before, all these strategies we have today, we built ourselves. We started opening it up to third parties [00:28:30] to create sets on our platform. That’s really what social trading is, is you have these sets where the strategies are not created by a team but by third parties. Some of these third parties are crypto hedge funds like Alphachain Capital or SW Capital. Some of them are professional traders, like Eryn Krueger.
These are folks that have been able to amass significant amounts of capital into their Sets. They implement a wide variety of strategies. Some of them [00:29:00] are also completely algorithmic where they have built their own trading systems and have connected that to the Ethereum smart contracts. On the other hand, you have some traders that do a semi-automated strategy where they look at indicators, but at the end of the day, they have the discretion to override an indicator if they feel that it is not correct.
We have two types of groups of strategies, which is the Robo Sets created by us, and then third party ones. In our platform—On TokenSets—we are focused on getting the [00:29:30] highest quality traders on our platform. We have over 600 people who are wait-listed who want to be social traders, but we’ve only really allowed the launch of 20 of them today. We really focus on quality.
Clay: Can a third party create a Robo Set or are Robo Sets only created by you? Let’s say there’s an algorithmic trader, and they want no day-to-day control, it’s all going to be run by the algorithm or the smart contract, they open-source that. Can [00:30:00] they submit something to Robo Sets, or are Robo Sets only created by you guys?
Felix: Robo Sets are currently created by us. One of the main reasons is that the Robo Sets require extensive amounts of smart contract skill sets and technical abilities to be able to generate. You have to write Solidity code to implement these Robo Sets. You have to connect them to the oracles. You have to write deployment scripts to deploy them onto Ethereum. You need to verify [00:30:30] the contracts once they’re out there. You need to run backend systems to constantly monitor and to be able to ping these Robo Sets to rebalance when needed.
It’s an immense amount of work to do, and most traders, they are very good at trading, but they’re not necessarily programmers, or they haven’t spent a significant amount of time investing in learning Solidity. We’re the only ones that have built Robo Sets to date, but there are many algorithmic traders that have built their own systems that are non-smart contract-based that submit trade signals into the existing [00:31:00] social sets.
Clay: For a listener who’s hearing this information and comes from the traditional financial world, maybe they’ve been an LP in a crypto index fund or a crypto hedge fund, are there KYC/AML requirements? What kind of lock-up is there? What kind of fee exists compared to 2 and 20? If you were going to create one of these product comparison tables, how [00:31:30] would this compare to, let’s say, Bitwise Investments index fund or other similar funds?
Felix: The first thing that you want to lay out and think about is really what types of asset management strategies are available for crypto and which ones are profitable? Originally, in 2017, it made a lot of sense to invest in an index fund of crypto products, and that’s where we started. There was a proliferation of tokens. [00:32:00] Any one token could have gone to the moon or 100X. Anything could have been the next Dentacoin.
It was smart to diversify across a large number of tokens. That’s what we believed had product-market fit back in 2017 and 2018. We were building products that were trying to create a decentralized index fund. Over time, in 2019, 2020, we saw that the long tail of tokens became much less interesting. Everything consolidated back into the large caps, [00:32:30] which is Bitcoin, Ether, and USD-based trading became very popular as well.
The product/market fit shifted, and we realized that what worked extremely well in crypto was a quantitative strategy. The ones that use technical indicators and where people traded based on different types of trends. That’s another type, and that’s really where we started because we see that it was the most profitable for the investors. Two, it was very difficult to implement for a [00:33:00] retail trader. Our products—just to be clear—are for the retail users today, whereas traditional crypto funds or even index funds are marketed towards institutions. People who can put in hundreds of millions or billions of dollars into these asset classes.
The nice thing about our Robo Sets today is that they have no fees compared to something like a traditional hedge fund, which is 2 and 20, or a traditional index fund, which is 2%. Right now, the [00:33:30] Robo Sets charge nothing. What’s really funny is that on a performance endpoint have been doing a lot better than traditional index funds or crypto hedge funds, even.
Clay: Hey! I wanted to pause for a second to let you know that this episode of the Flippening Podcast is brought to you by our longtime and trusted partner, Nexo. As someone who personally uses Nexo, I wanted to point out a few things that I especially like about their crypto-backed loans.
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All right, back to Felix.
Felix: With our Robo Sets, some of them—the best ones—are actually up 70% against the US dollar. This has been something that has worked extremely well to help, not only preserve user’s capital during extreme downturns, but help them amplify [00:37:00] the amount of return to get when the markets go up.
Over time we will start introducing fees. For example, with the Social Trading Sets, to use, the traders have discretion over what type of fees they can charge. They can charge an entry fee or a typical hedge fund type of compensation structure, whether it’s a subscription fee similar to a management fee, or a profit base fee, which is similar to [inaudible 00:37:25]. They can Set this on their own.
Some of them have Set it to a 0% [00:37:30] management and entry fee but maybe with a 10% profit base fee. Some of them are more evened out in terms of the type of fee structure they add. This is something that really democratizes the hedge fund products everyone else, whereas most people don’t have access to many of these other types of products you have offered. In addition, it makes it extremely accessible because one, it’s available to everyone in the world; two, it does not require KYC/AML.
All of our assets right now are focused on [00:38:00] spot commodities. The traders don’t need to be like a registered investment advisor or a commodity trade advisor, which is typically required for securities and registered commodity interests. In addition to that, because we’re not offering securities, we don’t need to be a registered broker-dealer as well. Those are some limitations that we have because we’ve built a non-custodial protocol.
We don’t have any capability to hold onto or move [00:38:30] people’s funds on their behalf. Those are a few things that are really powerful that distinguish us from some other traditional products. It turns out that the return profile of these products have been far superior to many traditional products, index funds, even crypto funds. Even many venture funds have failed to do better than our Robo Sets.
Clay: What about lock-up? Let’s say someone puts their money in, what restrictions exist around taking that money out?
Felix: There are no lock-ups. [00:39:00] You can take them out at any point in time.
Clay: That’s absolutely amazing. This has to be the way of the future. This has to be the way things are going. I’ve wanted to see something like what you’re doing for quite some time, and I agree with James. This is my favorite DeFi project right now.
Let’s say you are someone who’s been selected to create a Social Trading Set, what is it like for these people? Is there a friendly UI that allows them to make decisions and [00:39:30] apply those decisions? Do they have to have a developer on their team? What goes into running one of these Sets if you are a person, not at Set Protocol, who’s been selected to do this?
Felix: We’ve made the process of updating a Set extremely easy and initiating rebalances extremely easy. We securely launch with a user interface where you as a trader can view the existing position of the Set. Then we have this really beautiful interface [00:40:00] where it can drag between an asset pair and decide what to rebalance and when to rebalance the set.
For example, if you started with a Set that was 100% Ether, you can rebalance it into 100% USDC. Then what you do is you would need to connect your Ethereum wallet, whether it’s MetaMask, or your Ledger, or some sort of DAP browser that you use. Then you just submit an Ethereum transaction after you click a button. It’s as simple as that, and that will [00:40:30] automatically kick off a Dutch auction in which it would auction off the collateral—the Ether—for the USDC. That will happen under the hood.
The trader only has to worry about what to rebalance into and when, and nothing about the liquidity of the underlying, and what pricing you get when you do a rebalance. What’s really cool about being a trader on Set is that you get 24/7 direct access to our entire team. We set up a Telegram channel with the trader and a team. [00:41:00] We have constant dialogue and communication with all of our traders. We get really close with all of the folks.
Clay: They don’t have to worry about custody, they don’t have to worry about trade execution, they don’t have to worry about any of that stuff. They can just focus on generating returns. I also like how that UI shows how much the creator has personally put into a given Set. It lets you know how much skin they have in the game. I find that useful to have, so thanks for including that. I think that’s especially [00:41:30] important.
What risks are there other than the market going down? Let’s say there’s a category of risks that have nothing to do with market movements and just making incorrect bets. What other risks might exist, security risks, tech stack risks, liquidity risks? If you were advising a highly technical person in your family—who you care a lot about—thinking about investing in this space. They didn’t know a lot about crypto, but they were [00:42:00] technical. What would you tell them, and what would you advise them when it comes to risks outside of just number go down?
Felix: Ironically, number go down is what our Robo Sets want because that’s actually where the strategy’s profit is that it saves you from when those periods of time happen. Typically, when the number goes down, it rebalances into USD, and then you would actually buy back [00:42:30] at a much lower price. As a result, you would’ve multiplied or earned more Ether because of the price drop. Our strategies thrive in times of huge drops and huge gains.
In terms of the types of risks, there are really two categories. One is a smart contract or security risk. Then two is economic, security, and risks. With the smart contract risk, that really is about, the security of the smart contract’s [00:43:00] Solidity code. Has the code been written properly? Does it have bugs? Are there errors? Are there vulnerabilities? Luckily, over time, the entire Ethereum community has started taking security extremely seriously, particularly after the 2016 DAO and Parity hacks.
It is best practice today to have your smart contracts audited by multiple auditors. That’s what we’ve done with Set is when we initially launched the protocol back in [00:43:30] early 2019, we had three sets of auditors look at our smart contracts. We’ve used the best in the industry. We used Trail of Bits, we had Chainsecurity look at it, and we had Jonathan Haas from [Brama [00:43:42]] as well.
Any new code that we write, we also have every single line of code audited too. For example, when we launched the version two of our Rebalancing SetToken system, we had PeckShield, which is a Chinese-based auditing firm, look at our smart contracts. [00:44:00] They are actually the ones that found some of the vulnerabilities in MakerDao’s MCD system, ahead of their launch.
In addition to that, any smaller pieces of code, we’ve actually worked with boutique agencies to look at our code ahead of any deployments. We feel very confident about the security of our code, and particularly given that our protocol has been live for so long and there haven’t been any issues.
The second type of potential [00:44:30] issue really is around economic issues. One thing is that we do rely on MakerDao oracles. If those oracles are out of sync, or not updated, or manipulated, that may cause issues with the pricing of the auctions or with making a rebalance when you should not have made a rebalance. Those are some issues in addition to that.
The other thing—is really economic in nature—is the way the liquidity of the underlying tokens. We’re very careful [00:45:00] about the types of tokens that are listed because we would need market makers that are hooked into our platform before we launch something. We’re very careful about the sizes of the rebalances. For example, if we have a rebalance that goes through that is about $3 million of size, we need a certain number of market makers that can provide $3 million of liquidity for that rebalance to ensure that the slippage levels are acceptable or low. If there are not those number of market makers online, then the slippage level can be high. [00:45:30] You wouldn’t want to lose 5% on a trade when going from Ether to USDC. You’d be okay with something like less than 1%.
Clay: Hey, this is Clay cutting in from the editor’s booth to explain a bit more about slippage. Slippage is simply the difference between the expected price of a trade and the price when a trade is executed. In Felix’s example, a person swapping ETH for USDC expects a certain amount of USDC to be available at the current spot price. But if enough USDC isn’t available at current spot prices, then some [00:46:00] of the ETH will need to be sold for the next-best price, and then next-best price after that until the order is filled resulting in a higher average USDC price than might have originally been quoted. That’s slippage. All right, back to the show.
Felix: That’s something that we have to manage as well, and of course, also presents a risk.
Clay: When it comes to managing these large block trades as TokenSets get larger and larger, more users, more capital, these are going to be larger and larger trades happening at predictable [00:46:30] times. What manual control do you have over that? Can you pause rebalancing or wait for that to execute when you’ve lined up the proper counterparties? Is there a manual component to this, or how do you manage risk around that, around slippage in block trades?
Felix: Right now, like I mentioned before, we implement a Dutch auction for our block trades. Essentially, our largest rebalances to date have been about a little more than [00:47:00] $2 million, so $2 million gets auctioned all at once. It’s auctioned where the price starts high. Let’s say 1% above fair value, and it hits fair value over time, which is when the value of the assets being deposited equals that of those being withdrawn. After that, there’s a spread for market makers.
How our auctions work is that the price improves in favor of the market maker by 1% every 10 minutes. Imagine that after one minute it would be 0.1% improvement and so [00:47:30] and so forth. Doing a block trade of $2 million is fine because there are market makers who may have millions of dollars on hand that can take down these auctions at sufficient liquidity. Imagine if we’re doing a $50 million block trade. We would need a lot more liquidity, and most folks do not have that much capital on hand.
Some of the scaling things that we’re doing are trying to break up these block trades. Typically if you have a large hedge fund, you will typically use a more sophisticated execution [00:48:00] algorithm like time-weighted average price, which is TWAP, or something like VWAP, percentage of volume, or you would do something like iceberg. The idea is that you’re splitting up a $50 million trade into 10 $5 million chunks. These are some of the improvements that we’re making on our liquidation mechanisms to allow us to scale and handle much larger rebalances. These are things that traditional hedge funds, ETFs implement as well.
Clay: I’d love to dig into that, a little bit more. [00:48:30] Is this something that happens on chain and is facilitated by the Set Protocol and it happens at specific times, so there’s actually OTC desks, or market makers, or people who are willing to be counterparties on these trades sitting around waiting for this auction to start? Then they start bidding using some UI provided by the protocol. How does it actually go down?
Felix: In terms of when the auction begins is determined by Robo Set strategy, or whenever a social trader decides to [00:49:00] perform a rebalance. That immediately kicks off the Dutch auction. We have a network of market makers and liquidity providers who are connected to take down these auctions. Some of them have built fully automated systems where they do an on-chain arbitrage to take down some of these auctions that provide liquidity. This is typically what happens for many of our smaller auctions that they are taken down automatically through the systems.
We also have other types of market makers that treat these auctions as OTC [00:49:30] trades. Whenever they anticipate rebounds happening, they’ll load up their Ethereum wallets with $1 million dollars of Ether. Then when the auction begins, they go onto Set Protocol—TokenSets’ UI—and then they bid on the rebalance when the price becomes favorable enough for them to take it down.
Some of them have a mix where they have a semi-automated system, and they have the ability to override. Typically, these market [00:50:00] makers will float themselves using Binance, or Coinbase, centralized exchanges, or they have their own other liquidity pools that they pull liquidity from. We have a whole spectrum of market makers that are able to connect and take these down. We expect that the breadth of market makers increase as we are able to facilitate much more volume over time.
Clay: There are different portals on the website for different types of users. Obviously, for people that are looking to buy and sell these sets, the average consumer investor [00:50:30] that would use this, there’s a portal for them to buy and sell. Then there’s, I imagine, another portal for the traders that are running these social trading sites where they can initiate rebalances and things like that. Are you saying that there’s another part of this website where market makers, liquidity providers, OTC desks, et cetera, can log in to participate in these Dutch auctions? Does that happen through the website or through some other UI?
Felix: Correct. It [00:51:00] does happen through this website. If you actually scroll all the way to the bottom of the site, on the footer, there’s something called Rebalances. That’s really the UI part of the site for the market makers. You don’t need to log in. You just need to connect your Meta Mask account or your Ledger and you can get started. Anyone can provide liquidity on these auctions.
Clay: Okay. Got it. It’s not exactly like a two-sided marketplace. The whole [00:51:30] system does require liquidity providers to be participating. I imagine that was a fair amount of work to build this community, from the ground up, to allow this to happen. Is that correct?
Clay: I’m learning a lot as I go through this. That’s super fascinating. I love how nearly every part of this has been democratized. It sounds like the only thing that really requires some validation or vetting is to be a trader. That’s probably a good thing
[00:52:00] If there are no trading fees right now, how do you guys make money? What are your incentives?
Felix: In terms of our incentives, the idea is that in the future, we will charge some sort of entry or exit fee. When someone mints a Set or exits, we’ll have some sort of 30 or 50-basis-point fee. We’ll be making money off of the volume of people going in and out of these sets. In the future, we might add some subscription fees to the Robo Sets. The longer that you put your capital into the Robo Sets, you get [00:52:30] charged for that, similar to the compensation structure of an ETF or index fund, which typically has an expense ratio. Those are the ways that we’ll be monetizing on TokenSets.
Clay: Let’s transition to the next chapter, which is really about the prehistory for what you’re doing. Index funds have been around for a long time. ETFs have been around for a long time. What about social trading? From a product perspective, where did you draw your inspiration for [00:53:00] social trading? Has this ever been done really at any meaningful scale in the traditional financial world prior to DeFi?
Felix: Most people in the United States don’t know about it because there are no really great examples of social trading, but social trading has been around for over a decade now. It started in the Forex trading universe. The company that has really become the leader in social trading is one called eToro. EToro is pretty big now. They have [00:53:30] been at the peak, probably have been facilitating half a trillion dollars of volume a year from their copy trading features.
Essentially, eToro’s the biggest but there’s a number of other players like ZuluTrade, or Collective2, [Amongo 00:53:44] as well—a German player. Social trading has been a development, and many people in Europe think it’s the future of finance. Whereas traditional hedge funds and asset management is very opaque, very inaccessible. Social trading [00:54:00] has proved itself to be a lot more accessible, open to more people, the data is all transparent. There’s a lot of academic research that’s happening on the social trading side, particularly from academic institutions in Europe.
Social trading is only starting to become a thing in the United States. For example, eToro launched crypto social trading in March 2019. Robinhood is exploring adding social features onto their platform. We believe that social trading is really [00:54:30] what’s going to resonate with the millennial and the Gen Zs the most. That gives us a lot of confidence that the industry, not just crypto, but broader in finance is moving in a direction of embracing social trading.
Clay: Has eToro always been crypto-only, or were they doing this prior to crypto?
Felix: They were doing this prior to crypto. Crypto was a bit newer phenomenon. They started as a brokerage that was trading traditional assets like [00:55:00] commodities, ETFs, stocks, derivatives. Crypto was just another addition to the mix.
Clay: Let’s move on to chapter three, how to get started on TokenSets, both as a user and as a Social Trading Set creator.
Let’s take folks through a step by step walkthrough. Let’s say they find a Robo Set, for example, or a social trading Set that they would like to [00:55:30] get involved with, what do they need to get started? What do they need before they can purchase a Set?
Felix: You don’t need much. To get started with getting a Set, some people log in with MetaMask or Ledger. If they use a dot browser like Coinbase Wallet or IM Token, they could use that as well. For those who don’t use any of those solutions, you can just sign up with your phone number, or you can sign in with your email. If you do that, it’ll [00:56:00] automatically create a hosted Ethereum wallet for you. From there, if you already have some crypto on exchange like Binance or Coinbase, we prompt you to send it in through our onboarding flow, or if you don’t even have any crypto, you can actually pay via a debit or credit card.
It’s super easy to get started. In the future, we will actually be planning on building a native fiat OnRamp support. Not only [00:56:30] can you pay with debit or credit card, but you can even connect your bank account even and go directly from money in your bank to a Set all in one single transaction.
If you’re not starting with fiat, you can pay with a variety of tokens. You can pay with Ether. You can pay with USDC, with wrapped Bitcoin. Any asset that we support you can pay with. Once you get started with an account, you can explore the different types of Sets we have available. You can look at the Robo Sets. [00:57:00] You can read the descriptions. You can see the history of performance. You can read and explore the backtests that we’ve done for our Robo Sets. Once you’re comfortable with a set, then you can acquire one. That’s super easy. You click the buy button, you put how much you want, and then you just click ‘buy’, and you’re able to get one in just, two clicks.
It’s the same thing for social trading where you explore the traders, you read the descriptions of their sets, [00:57:30] and then when you’re ready to make a purchase, you simply click ‘buy’ and it happens. Once you submit an Ethereum transaction, it gets mined, and you own a Set today. Selling is just as easy. Once you want to sell the Set to the underlying asset, then you do the inverse process. Like I mentioned before, there’s no lockup periods or anything like that. You can buy a Set one minute. If you have regrets, then you can immediately return it. It’s pretty seamless.
Clay: I like [00:58:00] the phone number feature there and the ability to do this without having to touch things like MetaMask. Can you buy a fraction of a Set, or do you need to buy an integer multiple of a Set?
Felix: Absolutely. One of the beauties of crypto, in general, is that you don’t have to buy a specific multiple of a set. You can buy a fraction of a set. You can buy 1/100th, 1/1000th. You can buy a milli-cent of a set. There are no restrictions on the minimums.
Clay: Let’s talk about [00:58:30] creating sets for social traders. You mentioned that there is a long waitlist, so there’s a lot of people who want to be producing sets. Is that something that most people can realistically think about doing in the short-term, or do you intend for this to always be a highly curated process that isn’t going to involve thousands upon thousands of traders? Is it realistic for a very talented trader?
Let’s say there’s a kid [00:59:00] in India who’s been trading out of internet cafes and getting 1000% plus returns year after year, bull and bear markets, just crushing it. They can show the history of all their trades, they come to you and say, “Hey, I’d really like to be a trader. I think I can create a lot of returns for your users.” Is it realistic to think that they’d be able to get account set up anytime soon?
Felix: Yeah. If you have someone like that, and they’re able to show us the track record, and their thinking around their [00:59:30] strategies coherently, then we’d love to have them on board. The way we think about these strategies is like content. A good analogy is for video content, there are companies like YouTube. Anybody can create content and upload them. You have the other model, which is more like Netflix, where they’ve curated the content and created some themselves. As we researched social [01:00:00] trading, it turns out that more than 70% of users can’t make a return for their followers net of fees. We will call those, I guess, unskilled traders.
What we want to do is ensure that our platform is high-quality and that these traders can, in fact, help users earn a return using their strategy. Where we want to focus on the highest quality traders and help them become successful initially. [01:00:30] That’s where we love to see people who have really great finance backgrounds. We love to see people who are running their own crypto funds already. We love to see people who have been posting lots of content on Twitter or TradingView to show all the work they’ve done that purports that they can earn the returns for the traders.
Typically these traders are the ones who may find it a hassle to set up their own fund. Typically, you have to [01:01:00] spend tens of thousands of dollars if you want to get something set up in the Cayman Islands. In addition to that, you have to go out and raise capital on your own, which is a hassle, but with social trading, we make that process extremely simple. To get set up as a Set, it’s a matter of a smart contract transaction and talking to us. You’re able to garner capital from anyone in the world, and it’s a very seamless process. What we found is that there are a number of sophisticated actors like hedge funds [01:01:30] that would very much prefer to use something like Set instead of a more traditional entity.
In addition, they have the flexibility to focus on driving alpha, and they have all the fee structure that they’re familiar with. In addition, like we talked before, you don’t need to worry about finding liquidity or trade execution. That is something that’s just inherent in the protocol itself in which it would try to get you the best price possible. [01:02:00] Those are some things you don’t have to worry about, which are great benefits to being a trader on set.
Clay: There are a few people I know that are excellent traders that have gone to create funds, and they’ve got to worry about feeder corporations, and stuff in the Cayman’s and a Delaware, and the LP Docs, and everything that goes into administering a fund. They end up really just hating themselves. They end up [01:02:30] not being very good at providing audited financials to the fund manager, even though they have the potential to create really amazing returns. They just turn dead inside at the thought of having to do all this stuff that had nothing to do with why they wanted to start a fund in the first place.
It seems like those types of people would make a really good fit for your social trading program. They don’t have to worry about custody. They don’t worry about settlement. They don’t have to worry about any of the legal things. [01:03:00] They can just focus entirely on generating returns and your platform takes care of the rest. That seems like a no-brainer for those people, especially if they’ve got a large YouTube following, or Twitter following, a large personal brand. It seems like that kind of person might be an asset if they were to come to your platform and say, ” I’m going to start something up here, and I’m going to tell my audience about it,” seems like a slam dunk.
Clay: Let’s talk about decentralization and trust. Let’s say, [01:03:30] God forbid, the entire Set Protocol team was on a flight somewhere and that flight, God forbid, knock on wood, all that stuff, but the whole flight goes into the ocean. What happens with all this capital and with all these funds? Is anything not recoverable?
Felix: No. If God forbid, knock on wood, and hope it doesn’t happen, but if we disappear, nothing really happens. People are still able to issue and redeem Sets. The only thing that is different is that, [01:04:00] I guess, no additional upgrades or changes can be made with the protocol if the governance were gone.
That’s one of the big things that we continue to strive for is to continue to improve and upgrade the protocol so that it’s able to cater to more traders. It’s able to cater to more users. Different types of asset management strategies can be added. Different types of assets can be supported. These are all things that improvements continue to be done. We believe in the concept of [01:04:30] progressive decentralization. Even though today, it is governed via a multisig, which is owned by the team. Over time, we believe that this is something that should serve as public infrastructure, and that over time, it will be the community that governs this protocol.
That’s something that we’re working towards over time so that if there were one team in the future that a plane blew up or something, then protocol will continue running and continue improving [01:05:00] without that centralized team.
Clay: Even the website, if the website were to go down, a third party could construct a website that would allow people to continue trading?
Felix: The beauty of the Set Protocol is that, if the website goes down, someone else can recreate it. Even right now, other people are actually going to be building front-end interfaces, for Set, on top of the Set Protocol. It just happens that TokenSets is the first one. All of the underlying Sets, and the permissions, and [01:05:30] all that stuff can be transported elsewhere. Some of the information that we do have is a convenience like we keep track of the trader’s names. We’ve archived their trading history, and some of the reasoning behind their trades, et cetera. Those are things that make the UI really nice, but all the underlying data that you really need is really all on the Ethereum blockchain.
Clay: Let’s transition to Chapter Four, Set’s operations and plans for the future. [01:06:00] Can you tell us about, location, team size, anything you can tell us about active users, revenue, whatever metrics you’re willing to share about your company would be helpful for this section?
Felix: We are a team that is predominantly based out of San Francisco. We are a team of eight. We have a few folks that work remote, like Anthony Sassano who is based out of Melbourne. TokenSets today is now serving thousands of users around the world. We have [01:06:30] garnered, recently, up to $9 million of capital in our Sets. We’ve done almost $60 million of buy, sell, and rebalance volume since inception.
We’ve been making a ton of progress lately, and we’ve seen some of our highest volume numbers in recent days. The word of mouth around the Set, and Sets, and their value proposition is really spreading now. We’re seeing an immense amount of growth today, and we’re pretty excited about [01:07:00] the future ahead of us.
As we continue to improve our offering, we’re able to onboard more really great traders in addition to building out our ecosystem. We would hope in the future that TokenSets ends up becoming the vanguard of crypto, and that other people may build the black rock using the Set Protocol.
Clay: Let’s talk, finally, about the future. In terms of upcoming features and product roadmap, what are you most excited about?
Felix: I’m really excited to [01:07:30] one, be expanding the scope of the types of strategies that we’re able to offer. Right now, our strategies are very much catering towards the quantitative type of strategies where you’re doing momentum trading. We’re excited to be increasing the trade frequency of these strategies. Today we do swing trading, which is maybe every few weeks, a rebalance happens. We want to enable some trading behaviors such as trading every day [01:08:00] or trading every hour or so. That will improve as we are able to bring more liquidity on board as Ethereum infrastructure improves.
We’re excited about adding more assets on to our ecosystem to enable a greater breadth of strategies as well. Today we have all the spot commodities like Bitcoin, Ether, USD, but we’d be excited to add Synthetix assets. People all around the world, for example, to invest in a Synthetix kind of S&P 500.
[01:08:30] We’re also very excited to add long and short tokens. Not only can you go long and sell it to USD, you’re able to profit from going leverage long or short on your positions, which opens up a whole new world for traders. We’re also excited about making some improvements to our platform. For example, we love to help grow by implementing an affiliate program. If someone like you or a YouTuber were to share Set, they can share [01:09:00] a link with their subscribers. If their users ended up buying a Set, some of the fee that goes to the company would be shared with the affiliate or the referer.
We’re very excited about some usability improvements as well. As the number of Sets on our platform grows, we want to make it easier to search, to filter, and to onboard new users. We’re excited about adding a fiat OnRamp directly onto TokenSets as well. Those are some of the things that we’re doing that we hope will continue to [01:09:30] drive additional volume growth on our platform and drive additional AUM growth on our platform too.
Clay: Felix, last question, it’s the question I ask everyone. If you were able to wave a magic wand over the entire crypto space and altruistically and instantly make something happen for the space, what would you do?
Felix: I would want all of the infighting in crypto to end. I want all the Bitcoin maximalists, and all the [01:10:00] Ethereum maximalists, and all the other coins to stop arguing with one another and focus on building the future. Our community is really great. It’s just we spend a lot of time fighting each other versus moving all in the same direction. If we just did that, we’d be making 5x more progress than we are today. [01:10:30]
Clay: That concludes my conversation with Felix Feng, co-founder and CEO of Set Protocol. I hope you enjoyed it. Before you go, I want to invite you to subscribe to our fully customizable daily crypto newsletter. It’s the first of its kind in the industry: you choose the delivery time and cryptocurrencies that you want, price updates, and news about. We’ll ship you tailored pricing data and market news seven days a week. It’s a great way to cut through the noise and drill down [01:11:00] to the crypto market info that matters most to you.
To subscribe, go to news.nomics.com. Again, that’s news.nomics.com. All right, that‘s it for this week. Stay tuned for next week’s episode. Until then, take care. Bye.
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