Melonport is dead. Long live Melonport.
The Zug, Switzerland-based company was created in 2016 to build a platform to enable the management of assets on the Ethereum blockchain. It did that.
Now the company is being dissolved, leaving behind an open-source base layer of code that others can use to add functions and better user interfaces. But Melon, the operating protocol, is live. And one of its creators, co-founder Mona El Isa, is embarking on new companies and projects to see through her vision of asset management on blockchain.
Melon is designed for people managing money for others. It’s not for individual token investors, who can trade on crypto exchanges and take responsibility for their own custody. Melon is targeted at the asset-management industry, which it sees as its eventual users.
The market capitalization of assets managed on Melon is negligible, still below $50,000. There are now 100 funds managed on the Melon protocol (known as the MLN Network), but the asset class itself is tiny, with just 12 digital assets to invest in. The biggest of these is a gold-backed stablecoin managed by Singapore’s Digix.
But a functioning asset-management capability based on blockchain is now an actual thing, albeit at a very experimental stage. It is part of small but growing trend in “decentralized finance”, or DeFi, which began with decentralized crypto exchanges, or DEXs.
The global DeFi industry manages about $498 million, according to DeFi Pulse, an industry website. Of that, Shanghai-based Maker DAO, a stablecoin tied to the price of Ethereum, constitutes 69% of market cap (see our story on MakerDAO). DeFi is volatile: the industry was valued at almost $700 million in July, but Bitcoin and other crypto prices have been sluggish since.
Funds will no longer be legal entities, but smart contractsMona El Isa, Madeeba
Melon represents the first move in the DeFi world into creating an asset management industry. By removing the costs of classical administration, FX fees, and other layers, funds, particularly smaller hedge funds, should be able to survive on relatively low levels of assets under management.
“All assets will be tokenized within 10 to 15 years and managed on the blockchain,” El Isa said. “Funds will no longer be legal entities, but smart contracts, with the prospectus and fees hard-coded, all open sourced.”
That’s the way it now works on Melon, anyway. (See here for our story on DEXs.)
But there are two big challenges that will take several years to work out: the tech, and the law.
Pioneering the tech
First is the tech. The entire DeFi space is very clunky, however. Only people familiar with blockchain technology can use it. It’s a long way from mainstream adoption. El Isa has just set up a new company in the U.K. called Madeeba, whose purpose is to develop a better “user interface” or U.I. Until these applications are easy and intuitive to use, De-Fi won’t expand beyond early tech adopters.
Other DeFi pioneers say Melon will need a lot of asset managers involved to become relevant. Shaun Djie, co-founder of Digix, says his company has just created a fund to operate on Melon. It is a structure to invest in a basket of tokens, including Digix’s gold-based stablecoin and the likes of bitcoin and ethereum. The fund is a hedging tool. (For more on another proposed stablecoin, Facebook’s Libra, see here.)
“We need asset management tools to tie in with traditional markets,” said Djie. The Digix Fund is one product that could be used to predict the value and supply of smart contracts – essentially letting people trade token protocols in a structured product.
“Fund management is early,” Djie said. “It’s not at the institutional level of interest. That will require liquidity, security, and custody.”
But attractions of DeFi asset management include no lockups, and low costs. And, he says, gradually the interfaces will become good enough for institutional investors to use them.
Lines to legitimacy
But the tech and its user-friendliness is only half the battle. The other is to get regulators to accept that blockchain technology can support a new asset-management industry; indeed, that this is the future of asset management, according to De-Fi proponents.
Madeeba is one of many blockchain companies that are joining a new group, Multichain Asset Managers Association, or MAMA, which is a trade association, also in Zug. El Isa is a member of the board.
MAMA’s mission is to bring together asset managers, investors, tech companies, and service providers with a shared goal of making blockchain the basis for the future of asset management.
It has about 60 members now, including crypto funds and blockchain projects as well as mainstream fund houses such as Credit Suisse Asset Management, says Hansjörg Hettich, MAMA’s executive director (and formerly a hedge fund investment structurer at LGT Capital Partners).
The association is working with Swiss and other regulators to make onchain asset management a reality for traditional institutional investors and wealth management firms.
Asset management reimagined
The people driving MAMA are financial-industry veterans. Unlike many developers in the crypto universe, they understand why financial regulation exists in the first place. They’re trying to work with authorities to update the law for tokenized markets.
El Isa spent seven years as an equities trader at Goldman Sachs in London, as well as managing portfolios at Geneva-based private bank Jabre Capital Partners, before setting up Melonport.
She and others at MAMA are trying to expose regulators such as Switzerland’s FINRA to the actual workings of onchain asset management.
“Regulators focus on KYC and AML,” she said, “but they ignore the benefits of asset management on blockchain,” such as automated reporting, fund actions and compliance. “There’s no room for rogue traders if you have immediately verifiable reporting tools onchain.”
She says the major obstacle is the law itself. In most jurisdictions, securities law requires licensed intermediaries, including fund administrators and auditors.
“But if technology can perform these roles better, do you still need this law?” El Isa said. This is the sort of question that MAMA was set up to address.
Regulators have yet to be convinced that blockchain can solve for issues such as KYC, or prevent money laundering and terrorist financing. Indeed, the DeFi world is hardcore crypto. This isn’t the place for nice enterprise blockchains brought to you by IBM and Microsoft.
Melon, for example, is basically an order book that aggregates five decentralized exchanges. The software provides a matching engine, manages subscriptions and redemptions, calculates NAVs and fees, and supervises risk-management rules for positions, concentrations, etc.
But it doesn’t do KYC. Of course, KYC can still be built in. Melonport was deliberately designed to allow any developer to create apps, to add modules that could include KYC. This is the sort of work that El Isa’s new company will be pursuing.