Melon is an open-source protocol enabling distributed digital asset management on the Ethereum blockchain, aiming to reduce administrative and compliance costs for managed funds.
Melon (a reference to μέλλων, greek for ‘future’) is an open-source protocol enabling distributed digital asset management on the Ethereum blockchain. The protocol creates the technological infrastructure for making asset management auditable, secure, and low friction. Using the protocol, anyone can set up, manage, and invest in funds populated with digital assets and regulated by user-defined rulesets. A user can invest in other portfolios or have others invest in hers. While the platform’s token, MLN, is used to execute fund operations, users do not interact with it: the cost of the network fee, paid in ETH, covers both Ethereum and Melon use. Melon operates with a ‘burn and mint’ token model.
The protocol was initially developed by Melonport AG, co-founded in 2016 by Mona El Isa (CEO) and Reto Trinkler (CTO). Mona El Isa is a former trader at Goldman Sachs who worked at Geneva-based macro fund Jabre Capital in 2011 and launched a hedge fund in Geneva before moving to the blockchain industry. Reto Trinkler studied mathematics from ETH Zurich—a prestigious technical university in Switzerland—and began developing Ethereum smart contracts in 2015. He helped develop software for blockchain consultancy Brainbot Technologies. Melonport transitioned to decentralized governance in February 2019, with the Melon Council DAO utilizing AragonOS. The initial version of the protocol features 85 funds managing $41 thousand in total assets.
Funds Layer. A ‘hub’ smart contract tracks and provides access control for various ‘spokes’ contracts. These include: a ‘vault’ contract that stores tokens on the funds behalf (all custody is on chain in a smart contract, a ‘shares’ contract that accounts for fund ownership, a ‘participant’ contract that enables investors to buy or redeem shares, and an ‘accounting’ contract that determines overall share price, tracks fund holdings, and computes pricing metrics. The fund can be configured to take management or performance fees, hence incentivize fund managers to make favorable trades. A ‘policy manager’ component can limit certain fund manager behavior, based on designated risk management rules: funds managers can be forbidden from deviating certain percentages from a reference price, restricted from exceeding a set number of trades, required to invest only in whitelisted assets, particular assets can be blacklisted, or funds can be set up to apply early redemption penalty, among other things. These features are still under development.
Infrastructure Layer. Whereas funds are controlled by individual managers and investors, the infrastructure layer, which benefit the network as a whole, is managed by Melon’s DAO, the Melon Council (MC). Infrastructure contracts include: an ‘adapter’ contract that converts generic exchange methods to a fund’s particular method, an ‘engine’ contract that buys MLN for ETH to pay for certain computations, a ‘price source’ contract (Melon relies on Kyber Network’s for its price feed but allows for general price sources as well) that provides general information needed for particular fund actions, and a central ‘registry’ contract that tracks and serves as an interface for infrastructure contracts. Management and performance fees are disbursed in fund shares at any block interval, as opposed to the quarterly or yearly fees taken in fiat in the traditional hedge fund world.
Melon tokens (MLN) are used to execute certain actions on the platform, such as setting up a fund, claiming management fees, and requesting a limit buy order. The ‘Network Transaction Fee’ for such actions paid in ETH, covers both the costs of using Ethereum’s computing power and using Melon’s software. Issuance of MLN operates on a ‘mint and burn’ model designed to make MLN a disinflationary token and ameliorate gas price adjustments. Three hundred thousand MLN tokens are minted each year. Melon’s governance DAO, the Melon Council, decides how to reinvest portions of minted tokens to further project development or add value, whether to adjust the portion of network fees paid for protocol use, or whether newly created tokens should be burned. Live information regarding token supply and burn rates are provided by Melon monitoring tools. OasisDex, Kyber, 0x, the Melon Engine and Ethfinex were announced as exchanges supported by Melon V.1.