Mona El-Isa, the cofounder and CEO of Melonport, explains how Melon, the asset management protocol which recently launched on Ethereum, makes launching a fund easier and less expensive, plus gives investors even more transparency into the manager’s decisions. She describes who will be using Melon, how the funds using Melon access liquidity if the protocol only connects to decentralized exchanges, what happens if bugs are found in the protocol’s smart contracts, and how know-your-customer processes are handled. Noting that the company Melonport will now be winding down, she talks about how the protocol will be managed going forward. Plus, we dive into the MLN token.
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http://ciphertrace.com/unchainedEpisode links:
Melonport: https://melonport.com
Launch of Melon 1.0: https://medium.com/melonport-blog/melon-v1-0-zahreddino-60105f51988d
Front and back office functions in a traditional fund vs. a Melon-based fund: https://medium.com/melonport-blog/what-is-melon-2018-edition-3437f3d064d8
Management fees in Melon: https://medium.com/melonport-blog/management-and-performance-fees-in-a-melon-fund-f1df2a26abd9
Integration with Kyber: https://medium.com/melonport-blog/kyber-network-melon-3f6bcfa2d328
Melonport will not exist by DevCon V: https://www.youtube.com/watch?v=YTLSnS4DTak&t=882s
Melon governance: https://medium.com/melonport-blog/introduction-to-the-melon-governance-system-f6ff73c70eb0
Melonomics 1: https://medium.com/melonport-blog/melonomics-part-1-aligning-interests-through-token-unification-d0b98a02de46
Melonomics 2: https://medium.com/melonport-blog/melonomics-part-2-the-melon-engine-48bcb0dae65
Melonomics 3: https://medium.com/melonport-blog/melonomics-part-3-counting-melons-7632afad844c
Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host Laura Shin. In case you haven’t heard, I am going to be doing a live podcast recording with Vitalik Buterin, the creator of Ethereum. Onstage, in front of a live audience, we’ll be discussing Ethereum 2.0, Polkadot, governance, and so much more. It will be in New York City on the evening of March 20, and the venue will be announced very soon. Keep watching my Twitter feed for updates on that score. We’ll have food, drinks, and giveaways.
There are just a few seats left, so buy your tickets now. Check the show notes for the link to purchase. Also, if you have a question for Vitalik, there will be a Q&A at the end. Audience members will have a chance to ask questions, but also podcast listeners can pre-submit videos of themselves asking Vitalik a question. I’ll select a few to play during the event. Just record a short video of yourself, one minute max, stating your first and last name, location, and affiliation if relevant, and asking your question. Email it to [email protected] with the subject line video question. Again, that’s [email protected] with the subject line video question. I look forward to seeing you there.
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Laura Shin:
My guest today is Mona El Isa, Cofounder and CEO of Melonport. Welcome, Mona.
Mona El Isa:
Thank you.
Laura Shin:
Tell us your background and the problem you’re trying to solve with Melonport.
Mona El Isa:
So, my background is in traditional finance. I started off my career as a trader, market maker, and prop trader at Goldman Sachs back in 2003. After eight years, I then moved to the buy side and worked in a hedge fund as a portfolio manager for four years, and following that, I tried to launch my own hedge fund, long/short equity hedge fund out of Zurich, Switzerland, and that was a complete disaster. So, that experience started with one investor offering me a 20-million dollar seed investment. I managed to raise another 10 million dollars next to that and launched the fund with 30 million, which anyone who’s raised 30 million will know it’s not an easy amount to raise, but it was a complete administrative and operative nightmare because what I learnt, for the first time in my life, was that Goldman Sachs and the hedge fund I had worked for had huge operational and administrative back-office support, which allowed me and my colleagues to focus purely on investing, investing decisions, and that was enabled because of their scale.
Unfortunately, when I went out with a small amount like 30 million, that burden fell on myself, and it came with a lot of extra hours, a very steep learning curve, and it also opened my eyes to how many financial intermediaries lie in the middle of one hedge fund transaction. So, just off the top of my head, I can count 5 or 6 intermediaries for every single transaction that occurs within a fund, so whether that’s a transfer agent, a custodian, a fund administrator, an external auditor, an internal operations team, compliance officers, and so on and so forth. So, this was mind-boggling to me, and the one upside of this experience was that for the first time in my life, I was able to understand how the entire engine of a fund works, of an asset-management company, from the complete back end to the front end, cycle of a trade, booking, risk management, compliance, and so on and so forth, and I suppose that set me up quite nicely for the next project, which was building Melon.
So, what we do with Melon is we set out, nearly three years ago now, to build a completely new infrastructure for asset management, which doesn’t need or require any financial intermediaries to achieve the same kind of security compliance, operational accounting standards that you can get in the traditional world but using the blockchain infrastructure. So, it’s a protocol that allows people to set up, operate, manage, and run funds within a set of rules using smart contracts as the automation engine and using blockchain accounting as the accounting tools.
Laura Shin:
Yeah, I find this so fascinating to think about. Like, there is a chart in one of your blog posts where you kind of lay out all the different roles and how they’re kind of traditionally managed, and then you have a column that shows how Melon manages it, and it’s all like smart contract, you know, replace this role with a smart contract and that role with a smart contract and etcetera. So, do you kind of want to describe, a little bit, what those differences are between like how a traditional fund is set up and how a fund with Melon is different?
Mona El Isa:
Yeah. Sure. So, in the traditional world, believe it or not, it can take between 6 months to 12 months to set up a fund, which is kind of mind boggling when you think about it. Why does it take so long? Because you need to find all the financial intermediaries you’re going to work with, you’ve got to negotiate with them various rates and conditions, and then you’ve got to set your fund prospectus up depending on which jurisdiction you’re regulated in and what kind of fund you want to set up. So, a fund prospectus is like a multi…usually about a 100, 200 page document which stipulates the rules of what this fund manager can and cannot do in his or her fund, and it’s designed to protect the end investors who are going to invest in your fund, and all of this is written in long legal-speak, and this fund prospectus is basically the basis for which your fund ruleset is going to live by.
Now, in the traditional world, you need a bunch of financial intermediaries to police you, to make sure that you do not breach any of the things that you said to your investors you would not do, and so that’s where all the financial intermediaries come in, because all the trades you’re booking are booked with paper certificates. They’re settling T+2, T+3. There’ s a very big lack of transparency in the traditional world, so you need human bodies and people to monitor and figure out where your positions lie, where your risk lies, to check your accounting at the end of the day to make sure your trades are reconciled and so on and so forth. So, that’s where all the costs stack up. Now, what we’re doing, on the other side, is we’re saying, so, sorry, take a step back.
That’s a several-month process and typically will cost hundreds of thousands of dollars per year, at least a hundred thousand, I would say. Now, taking a step back and imagining this new world that we have, which is digitized assets or tokenized assets, and this is fundamentally the biggest assumption we make when we’re building our protocol, that the future is digital, you know, all assets will have a tokenized form of some kind in the next 10, 20 years, and because we make this assumption, we’re now able to use an entirely new infrastructure to build funds on top of, and that infrastructure is obviously blockchain technology, and we’re now able to say, well, let’s take this fund prospectus idea and let’s build it into smart contract code.
So, what the Melon protocol allows you to do is say, okay, I want to set up a fund today, now I want my fund to be able to trade with this asset universe, this set of assets. I want it to be able to trade with these exchanges. I want to allow these 25 investors to invest. I want, you know, a 2 and 20 management and performance fee. I want maximum 20 positions. I want a maximum position size of five percent, and so on and so forth, all the stuff that you would typically find in a fund prospectus, you can now write in code or weave it in code. We’ve started writing in code, and the options are endless, and now managers can just, you know, select from this suite of options and put together this set of customized smart contracts and deploy that to the blockchain as their fund, and the fund address is now what investors invest into.
So, the smart contract rules are enforced by the blockchain, and the accounting is written in the smart contract code and enforced and sort of inherent to the blockchain quality, so you can calculate the share price of your fund, you can calculate your management and performance fees, the smart contracts can distribute the fees, and so you get this very powerful automation element. You get this other powerful aspect…one of the reasons you manage to reduce costs so dramatically is because you don’t need financial intermediaries anymore.
This also means that investors can hold custody of their assets at all times, because the token that they have in your fund is redeemable at any time for the underlying assets in the fund, and it means that they can trust the manager to manage their assets within the rulesets of the fund because the rules are transparent to the investor. So, you take the process down from a few months and hundreds of thousands of dollars to a few seconds, maybe a couple of minutes, and maybe at maximum a couple of dollars in gas.
Laura Shin:
Wow. That’s incredible, and just out of curiosity, so, we’re speaking, just so the listeners know, we’re speaking before you guys launch your mainnet, and you know obviously, as you have been describing, Melonport is a protocol. So, what does the front-end like user interface look like, both for the fund manager who wants to spin something up using Melon and then their LPs?
Mona El Isa:
So, the front end is pretty easy, as far as blockchain technologies go, to interact with, and it basically enables an easier way to access the smart contracts, so managers can download the code for the front end as well and operate their own front end, customize it, you know even customize to some degree by adding various smart contracts if, you know, we’ve made…we’ve built the first suite of smart contracts, but as you know, the asset-management industry is huge, so there’s potential to build a lot, lot more on top of Melon in the coming years, but yeah, the user has a way to interact with the contracts on the front-end level through downloading an app.
Laura Shin:
So, for fund managers that want to spin something up, should they have some coding skills, or is that not necessary?
Mona El Isa:
Ideally, they should have some coding skills whenever interacting with any blockchain technology which requires putting assets at risk, and that’s just simply because the technology is still very young and experimental, and I think it will still be at least another 2 or 3 years until people can start to feel very confident putting serious amounts of capital into blockchain or blockchain-run protocols or smart contracts just because the security processes that are in place are still very young and underdeveloped, but that’s changing very fast.
I would say right now managers can definitely set up funds and start to experiment by having, you know, a few investors, making trades with various exchanges, monitoring how the P&L works, checking that the risk management, if they try to breach a rule that, you know, testing to see whether the smart contract actually blocks the trade or not when it’s supposed to, and that’s what we’re excited for people to try out, to really start, to start testing the smart contracts on the front end, even to see that, you know, everything that you pay a fortune for in the new world and creates a lot of administrative and operational headaches can be done now with just a few clicks.
Laura Shin:
How are fund managers paid via Melon?
Mona El Isa:
So, they’re paid in the same way, almost in the same way that they’re paid in the traditional world. So, in the traditional world, there’s two ways a manager gets paid. They get paid a flat management fee, which is a fixed amount, a percentage fixed amount of the assets under management. They get paid per year, so if they’re…it’s typically between 1 and 2 percent of assets under management, and then they get paid a variable, which is dependent on their performance above a high watermark, so above…as long as they’re creating profit that year for the investors, they get to keep a chunk of that, and that amount is typically, on average, about 20 percent.
So, they get this. Obviously, in the traditional world it’s calculated in USD and paid out to them quarterly or at the end of the year, usually. In the Melon protocol, we have the contracts to do those calculations and distributions except that we pay them out to the manager in shares of the fund as opposed to in USD or ETH or whatever. They can be obviously sold and converted into another currency, but the actual mechanics of it pay out in shares of the fund. So, over time, the manager, the better he or she performs, will accumulate shares in his or her own fund.
Laura Shin:
And in terms of the time frame, I even read that that can be done down to the second rather than like quarterly.
Mona El Isa:
Yeah. Yeah, block time, yeah. Yeah.
Laura Shin:
Who do you expect to be using Melonport?
Mona El Isa:
I think initially it will be crypto managers because we’re talking about a decentralized technology, at the end of the day, and it still requires, you know, that the lack of financial intermediary means that you have to have a fairly good degree of understanding around how blockchain technology works, how to look after a private key, how to trade on a DEX, and so on and so forth, and that might sound easy to you and me, but I think, you know, for someone coming out of the traditional world, they’d find that a little bit complex still. So, I think the first use cases, the first users will probably be crypto managers who have been monitoring our project for a few years, and I think that the starting point will be that they’ll start to pilot test in small amounts and play around with the technology and provide feedback and hopefully get excited about it and start to pitch in with either adding to the kind of development or just joining the ecosystem in some way to help build this into an even larger and more successful protocol.
Laura Shin:
In long term, when the system is more robust, do you expect that we’ll see different types of people launching funds than have traditionally done so?
Mona El Isa:
Oh, absolutely, yeah. I would imagine longer-term, as things like security improve, things like regulatory clarification around, you know, how to use blockchain technology and financial services, as we see clarity in, well, as we see kind of, yeah, clarity in security token issuance, because that’s obviously a huge untapped pool of assets that can be traded on a Melon protocol. This would then start to bring in the traditional managers because I guarantee you that the high barriers to entry in traditional asset management is a serious problem.
There’s a lot of aspiring managers who dream of nothing more than to spend their time investing and who are pretty good at it but just never really get the chance, in a way like me, because they’re bogged down and burdened by the costs and time required to meet all the compliance reporting, regulatory obligations, etcetera, when you’re that small. I think there was a report out a few years ago saying that it’s estimated that you need about 200 million dollars in assets under management to survive as a fund manager within the first year of operating a fund, which is crazy when you think how low the barriers to entry in other industries are.
Laura Shin:
And wait, so why is that? Like, I mean, if you were saying it’s maybe like 100 thousand for the administrative stuff, I don’t understand why…
Mona El Isa:
So, 200 million dollars is what you’re supposed to be investing on behalf of other people. It’s not what you can spend.
Laura Shin:
Right.
Mona El Isa:
So, the fees you would extract from that are typically 1 or 2 percent per year, and then you typically need to pay yourself or one other person a salary, but in general, the operational overheads for a fund are 5 to 6 operational staff per investment professional. So, you’re looking at 5 to 6 employees internally, this is without like the external financial intermediary fees, just to make the operations of your fund work, compliance report, you know, and smooth.
Laura Shin:
Oh, I see. Okay, yeah, then that makes sense, and so do you also imagine that then, you know, because I guess like a lot of our financial services tends to be dominated, I think, even maybe by certain countries and geographies. So, do you imagine that we will also see this opening up opportunities for people in areas of the world where they’ve had less access to traditional financial services?
Mona El Isa:
I really hope so. It’s very hard to predict the future, but in a way, just thinking back to how, you know, when the mobile phone came out, it was adopted much faster in emerging markets than in developed markets because they just skipped the whole fixed-line thing because the infrastructure wasn’t there, and if you think about even solar panels, you know, they’re being adapted a lot faster in areas where they have no electricity because there’s no infrastructure there to begin with.
So, if you take these kind of leapfrog examples, then you can also say, well, in areas where there are financial services or the financial industry is underdeveloped and maybe partly because there’s a lack of trust in the people providing those services, I think there’s a good argument to say that they can leapfrog to a kind of more modern infrastructure before the developed world, because, in general, the developed world’s financial services work pretty well. I mean every 8 to 10 years you get this big kind of disaster, which has repercussions, but in general, on a day-to-day basis, you know, there is a fairly good degree of trust with a client in a bank and with your investments and so on and so forth, but in the emerging market world, I think there’s a big lack of trust there, which can really benefit from these technologies.
Laura Shin:
And so, as I mentioned, you know, you’re just about to launch mainnet, and I think by the time this comes out that mainnet will have been launched. What kinds of funds are you seeing interest from? You said crypto funds. Are those ones that are styled more like hedge funds or VC?
Mona El Isa:
Yeah, I mean, all sorts really. Like, we just had our second-ever asset management conference, blockchain asset-management conference in Zug last…it was two weeks ago, actually, and we asked that question to a panel of crypto fund manager, and then we asked the question to the audience, which I would guess was about 25 to 30 percent crypto managers, and we asked them, you know, who in this audience would be willing to pilot or will be piloting Melon and other decentralized financial technologies this year, as they go live, and there was a…almost all the kind of crypto fund manager hands went up in the room. So, that was encouraging to see. I think there’s a reluctance to go all-in, and I think that reluctance is completely justified. I think we have to remember that, you know, I said it earlier on the podcast, but the technologies are young, the security tools we have are young, you know, I think Melon will be the most complex protocol by a factor of almost five times to ever hit the mainnet in terms of the complexity of the smart contracts, and that’s something I want to be warning people about not being complacent about.
Laura Shin:
Yeah, well, actually that was my next question for you. One of the main issues, obviously, with crypto funds is the possibility that funds could be hacked or lost.
Mona El Isa:
Yeah.
Laura Shin:
And there’s actually a really similar issue with smart contracts where we’ve seen a number of smart contracts that have lost funds due to bugs in the software. So, how does Melonport secure funds?
Mona El Isa:
So, it’s not Melonport’s job to secure funds. In fact, Melonport has absolutely no control over the protocol whatsoever. Once it’s deployed to the mainnet, it’s really out of our control what happens. What we have tried to do is what we promised to do, which was when we first set out to build this project, we promised that we would do two external audits. We have done three on the final set of code and a total of seven in the last two years, seven audits, that is, but I would only really count the last three because the code has changed a lot in the last two years, and we’ve also been running several bug bounty programs in mainnet competitions to test the software. Having said that, you know, what you said completely holds.
You know we do see bugs occur, we do know that bugs can lead to a loss of funds, and we have to be very, very, very aware of that when using these protocols, especially as security processes are still quite young and take a lot of time, as well, but there are really great progress being made in techniques like formal verification and tooling and formal specification that we can start to use, but these take time, and this is definitely going to be a focus for us in the next coming two years, but this is over and beyond what we set out to do initially, and this will just be part of the next phase. I guess you can kind of think of this mainnet launch as we proved that it’s possible to get to a minimum viable product on the mainnet, and now it’s pretty exciting. You can set up a fund. You can trade. You can do all the things we said you’d be able to do, but next step is, right, how do we make this robust, because you want people to be able to trust this code with more than just testing money but substantially more someday.
Laura Shin:
And so if bugs are found in the smart contracts, then essentially you will what? You’ll upgrade those smart contracts, or how does that work?
Mona El Isa:
So, like I said, we, as in Melonport, have no more control over this because it’s a decentralized governance structure. So, what recently happened in the beginning of February was that we handed over the protocol to the Melon council, and the Melon council will be looking after the protocol upgrades and reviews from now on as well as setting the network parameters and deciding on future resource allocation. So, the former Melonport team will have a seat on that council, but there are several other members on that council that will have to vote, you know, on all upgrades and decisions, and these include two auditors, well, actually three auditors, one of them being a formal verification expert, so ZK Labs’ Matt Di Ferrante, Martin Lundfall from MakerDAO and DappHub, and Nick Munoz-McDonald from Solidified audits.
And then we have Will Harborne from Ethfinex, so one of the decentralized exchanges that have been integrated into the Melon protocol, and then we have other members on the council who have other degrees of expertise. I think the total number of council members was eight, so you can start to see that 3 out of 8 were auditors, and that hopefully kind of emphasizes how importantly we think about security, going forward. Going forward, the council will grow by consensus. So, Melonport set the initial council, and from now on, anyone who wants to join the Melon Council will have to apply and be voted in by consensus.
Laura Shin:
We’re going to talk about governance more later in the show, but I wanted to also ask you, so, the protocol only uses decentralized exchanges, but right now decentralized exchanges don’t really have sufficient volume, so how do you guys get good prices for the fund managers who might want to use the protocol today?
Mona El Isa:
That’s a great question. So, we leverage off Kyber Network’s mechanism. So, Kyber Network has a system of plugging in reserve managers which provide bids and offers, and it always shows the best bid and best offer at any one time. Now, we were a little bit skeptical of this idea at first, but we were told by Loi Luu that the…
Laura Shin:
The founder of Kyber, for people who don’t know.
Mona El Isa:
Exactly. We were told by Loi that in general the bid offer on Kyber didn’t differ more than about 1 to 1 and 1/2 percent from centralized exchanges at any one time, and honestly we didn’t believe him when he said that. So, we actually almost dismissed it but then thought, hang on, why don’t we back-test it ourselves and see? So we did, and he was right. We found that actually the bid offers are less than, in most cases, less than 1 percent and at most have been less than 1 and 1/2 percent, and so actually the concept was pretty neat for us because, you know, these are unchained prices that are provided by Kyber, so it prevents us from having to push prices to the blockchain through an oracle or other means, which also means that it’s more cost-efficient for us, and also if someone or if a reserve manager in Kyber is providing a wrong price, there’s a substantial financial loss for them because, you know, they will be forced to trade at that price. So, it seemed like a good win-win situation.
Laura Shin:
Well, couldn’t they be doing something like taking a short position and then falsely quoting a low price and/or colluding with others in order to get some benefit?
Mona El Isa:
I mean can you elaborate on the example?
Laura Shin:
Well, I just mean like if they sort of know that Kyber is the one source, like I just feel like there would be ways in which they could maybe even collude with others. So, maybe you’re right that like one of them sort of pays the price, but then if they’re working in concert with others, then they could take some other position that would benefit them.
Mona El Isa:
Yeah, so, I mean the way that it works is there are quite a few reserve managers plugged into Kyber, and Kyber will always pull out the best bid and the best offer at all times. So, in theory, you should always have the best bid and the best offer, and if someone is trying to manipulate the prices by offering something that is substantially worse, then the logic goes that their price wouldn’t be an option in the first place. Now, if they all collude and they all provide a wrong price, then, I mean, which I find pretty unlikely because a lot of reserve managers on Kyber are anonymous as well, but they’re also staked to quite a high degree.
So, I mean, the only benefit they could really get out of it is buying fund shares at the wrong price, and even that, they wouldn’t be able to do because there is a delay mechanism by which the council, the Melon Council, has a possibility to stop prices being provided for the prices of the NAV calculation that’s the share-price calculation of the fund. So, there is like a check mechanism whereby if the Melon Council or if a software it uses notices that the prices are off, they can just not push the prices, which means that for a certain period, funds don’t get a price, but it’s better than the alternative, which is, I think, what you were getting at.
Laura Shin:
We’re going to discuss governance and the Melon token after the break, but first a quick word from our fabulous sponsors.
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Laura Shin:
Back to my conversation with Mona El Isa of Melonport. I also wanted to ask you, so, we’ve been talking about how, right now, things are kind of experimental because it’s new. So, what benefit is there to LPs to invest in a fund that uses Melon?
Mona El Isa:
I think being on the forefront of what’s about to happen in decentralized finance is a big reason to be playing around in and dipping your toes into this technology because it’s really pivotal. It’s true that it’s not going to happen overnight, in my opinion, but it’s happening fast, and it’s not just Melon. It’s an entire ecosystem of players that are coming together and linking their technologies together, and this makes it much more powerful than if it was just one company building one protocol. So, just as an example, you know, Melon has integrated, together with Ethfinex, as a decentralized exchange, OasisDEX, which is another decentralized exchange, Kyber Network, and Radar Relay, and ERC dEX, which are 0x relayers, and this is, I mean, we would’ve done more.
It’s just that we’ve been fairly time constrained on what we could do in two years, and then we’re running our governance structure on Argon OS, and this is just what a team of 10 developers, not even, 9 developers has managed to do in two years. So, as we grow, as we move to the next project and continue to grow, as the ecosystem around us grows, you know, these technologies become stronger and stronger, the liquidity problem becomes easier to resolve…you asked about liquidity before. So, there’s five DEXes we have integrated now, and we’ve aggregated the order book, so it’s still not great liquidity, but it’s an aggregated order book, which means that from a user perspective, they’re getting a deeper, you know, with one protocol, they’re getting access to all five order books at the same time and being able to get better execution price and better liquidity, and a year from now, that 5 exchanges might be 10 or 15,and two years from now, it might be 30.
At the same time, we might have found better solutions for scalability, which means that liquidity naturally will increase. There may be more regulatory clarity around decentralized exchanges and peer-to-peer trading, which will bring more professional traders and market makers into play. You know you’re even starting to see centralized exchanges like Binance and Coinbase, you know, make acquisitions or develop their own internal decentralized exchange software. So, it’s just a matter of… Ethfinex was a great example of how they port the liquidity from Bitfinex to Ethfinex, and as a result makes them one of the more liquid decentralized exchanges. So, there’s still a lot of innovation going on, and I have no doubt that the ecosystem and all the challenges or problems that remain will get solved and that the good news is there’s more and more talent coming into the space. There’s more brains solving the same problem, and that means that the solutions will get better and better and faster and faster. So, it’s just a matter of time.
Laura Shin:
So, as you have been mentioning, this is an area that’s typically highly regulated, so how does Melon handle know your customer and anti-money laundering processes.
Mona El Isa:
So, Melon, the Melon protocol has a tool inside it or has a functionality inside it which allows people to whitelist which addresses are allowed to invest in their fund. Now, the KYC/AML is handled by the manager independently because this is not something that Melonport does. Melonport does not operate the software and certainly doesn’t sell the software. This is all open source, under the open-source licenses that we use, and people have to use it according to their jurisdiction and their requirements. So, they’re going to differ from place to place, and they still remain quite challenging, the regulatory issues around these technologies, and the main reason for that is that most law that’s been written about asset management and financial services requires , as a legal requirement, financial intermediaries to check transactions, accounting, and all that kind of stuff.
So, we argue, when I say we, I’ll tell you about that in a second, that if the smart contract and the blockchain can replace the financial intermediary with arguably, eventually, more security and more transparency than the financial intermediary and for less cost, then maybe these rules should be adapted for blockchain technology, and we realized this over a year and a half ago, which is why we set up an association called MAMA, which stands for the Multichain Asset Managers Association, and this association lobbies globally for raising awareness about decentralized finance technologies and why the financial intermediary will become less important over time.
And we’ve had some great successes lately with the Swiss lawmakers, where the blockchain federal report mentioned on-chain funds, which was a huge win for us. We’ve also seen wins in France, where our feedback got put through to the French Finance Ministry, and we’re having success in Liechtenstein and Malta, to a lesser degree, as well, but it’s still, you know, there’s a lot of work to do, and we’re very blessed and lucky to have…I think we’re up to 70 members now. Most of them are builders like us in the decentralized finance space, and most of them are very active with us and helping from their jurisdictions as well.
Laura Shin:
And one other thing, so, you keep kind of talking about these different entities around the Melon protocol, and like a couple times in my questions, you sort of said like, oh, well, you know, it’s not Melonport that’s doing this. So, can you just describe some of the different entities and also talk about how you’re winding down Melonport?
Mona El Isa:
Sure. So, Melonport was mandated for a two-year workshop to build the Melon protocol and deploy the Melon protocol, and that’s exactly what we did. In fact, I think we did more than what we said we would do. Now, the association was created a year and a half ago after we saw a need for something like that in order to help drive adoption later. That was just a side hobby. It was never part of any promise. We just thought this is something this space can benefit from. So, we helped set that up. It’s not run by us. It’s run independently from us by a strong team of people. We just support it, and so do, now, another 65 or so companies support it. The Melon Council is the body that will look after the protocol after Melonport is wound down and have already been handed over everything they need in order to do so, and they will push…they only have three things that they need to do.
One is deciding on upgrades and pushing upgrades through the network, but ultimately it’s the user…they can never force a user to upgrade. It will always be the user that has to opt up to an upgrade, but there’ll always be something recommended by the council. They also have to decide on how to allocate the resources, and by that I mean the Melon token inflates by about 300 thousand tokens a year, and this pool of tokens is there to allocate to developers, well, 80 percent of it is to be used to be allocated to developers or security, audits and formal verification or anything like that, and the 20 percent of those tokens are to be remunerating the council, and then the third decision they get to make is adjusting the network parameters, and so for those of you who don’t know, the Melon token is a utility token which operates much the same way as Ether does on the Ethereum blockchain.
It’s a gas for asset management except that it’s not charged on every single function you call in the Melon protocol. It’s only charged on three functions in the protocol, and that’s designed specifically to keep costs low to the manager and to keep friction low. Now, there’s a possibility that the gas price can spike if the usage of the network goes up dramatically or if there’s a dollar/ETH volatility or Melon/ETH volatility, and therefore we want to be able to adjust that parameter so that if it does get too expensive to use, it can always be adjusted down by the council.
Laura Shin:
Wow, and also talk about the other part of governance, which is the business side, the Exposed Business representatives.
Mona El Isa:
Yeah. Sure. So, the council, okay, so the council is composed…so actually that’s, so, if you think about the stakeholders in the network, there’s three stakeholders when it comes to the asset management ecosystem. There’s the users, which we define as the fund managers and the investors in those funds, there is the token holders, and there is the future maintainers and developers. So, we believe that we’ve looked after the token-holders and the maintainers/developers through our token design, which very nicely links the usage of the network or the number of users on the network to the purchasing power of the token. So, this makes token-holders happy and this makes future maintainers and developers happy because if they add value to the network, the likelihood is that more users will come to the network, which will benefit the purchasing power of the token.
So, that leaves one stakeholder group that is un-looked after or not represented at all, and those are the users, and you know this is a problem because the users are probably the most important people we need for a protocol to be successful, because let’s face it, without users, you know, the whole thing is a failure, and the users are also the most vulnerable because they’re putting real assets on the network. So, we thought hard about how we could represent them, and our conclusion was that there had to be a pretty strong body in there who was going to be making future decisions, and that would be the Melon Council, and the important aspect we considered when designing the Melon Council was that we wanted it to be technically skilled and user representative, so technically skilled because user security and features decisions should be made by qualified people and not just by unknown, unidentified parties who may have other interests or conflicting interests.
And the user representatives because we believe that the user should be able to self-nominate representatives on the council that can tell us what the users’ priorities are and tell the council, you know, we want to be using this more, but we’re worried about security, so we want you to allocate all your funds to security, or 90 percent of your funds to security, this year, or you know actually we’re pretty comfortable with security now, but we need you to build this feature in that we really need, and if we had this feature, we could do like a hundred or a thousand more funds on this protocol. So, this is really the thinking behind the council. It’s to represent the unrepresented stakeholder group in our network, and we hope that the design we’ve chosen will prove to be successful on that front.
Laura Shin:
And how are they chosen?
Mona El Isa:
Which one, the council or the…?
Laura Shin:
Yeah, I mean, like you’ve talked about their requirements, but then how, how do they get…?
Mona El Isa:
Yeah. So, Melonport chose the initial council, so that would be the technical council because there are no users yet, since we’re not on the mainnet yet, and for every five technical council members, two user representatives can be nominated, nominated by the users and enter the council. So, the users have to be self-organized through a body of their own, and they get to elect 1 or 2 or 3, depending on the ratio, representatives that then can enter the council and start voting with the council on decisions.
Laura Shin:
And let’s talk also now about the Melon token. In your system, people can use Melon, but they can also use Ether. So, why don’t you describe the purpose of the token and how that works?
Mona El Isa:
So, actually, you do need Melon to use the protocol, but we abstract this away from the user by charging gas fees in ETH just to improve the user experience. So, on a function that you…you would basically get charged on set-up fund according to the computational units you’re consuming, and we use the same unit calculation that Ethereum uses for smart contracts, but this time we multiply that number of units by the Melon gas price and not the Ethereum gas price. This gives the amount of ETH charge.
The ETH goes to a contract called a Melon engine smart contract, and the Melon engine contract basically is like a unidirectional market being provided in ETH/Melon. So, it’s always selling ETH and bidding for Melon, and the more ETH it acquires or the more ETH in the Melon engine, the higher the premium it bids for the Melon. So, basically you can almost guarantee that the Melon will always get bought because someone will arbitrage it, and then it gets burnt immediately, and it’s the burn that’s the really beautiful part because it really links the usage to the purchasing power though what…we’ve modeled this off the MV=PT or the…
Laura Shin:
PQ?
Mona El Isa:
Yeah, you can have both, PT or PQ, quantity or transactions, so that it’s an economic identity. It’s not a valuation metric by any means. It’s an identity, which always holds, and so we can keep the purchasing power high by two ways, one, because we’re burning the token, so we’re completely removing it from the supply and linking the usage to the purchasing power, but we’re also keeping V low, and you’ll have read pieces by Kyle Samani and Ryan Zurrer and others who talk about something called the velocity problem with tokens, which says that if velocity gets too high, then actually the purchasing power of the token goes down, which is…
Laura Shin:
Velocity is basically like the turnover?
Mona El Isa:
Exactly.
Laura Shin:
Yeah.
Mona El Isa:
Yeah, and so, by having this burn mechanism in there, we prevent that same token from being recycled into the asset-management network or economy, if you think about it as such, which dampens the V, dampens the velocity, which enables the purchasing power to really kick in. So, you know, all of that is obviously assuming that the token is only used for asset management, which we hope it will be because it shouldn’t be used for, you know, buying and selling goods. Like, there are better tokens to do that for.
Laura Shin:
You’ve talked a little bit about this before, but let’s dive a little bit more into the inflation of the Melon token. How will that be handled in the future, and what will the inflation be used for?
Mona El Isa:
So, the inflation is created at the start of every year, and it goes into a multisig, which is controlled by the melon council, and this inflation is about 300 thousand tokens a year, so it’s disinflationary. It starts off as a percentage quite high and drops substantially each year. It’s basically 20 percent of that 300 thousand would be used to compensate the Melon Council, and the other 80 percent is there for a few different purposes. It’s there to attract developers to complete Melon improvement proposals, which we have on our GitHub, so we had a lot of suggestions and great ideas from our community in the last two years, and we didn’t have time to complete them all because we had priorities, but we documented them all in a repository, and we hope to be able to remunerate people from those Melon tokens who put their hands up and say I want to develop this feature, etcetera.
We’d like to see, although we don’t fully control it at this stage, but we’d like to see the Melon Council allocating a lot of those Melon tokens towards security, in particular maybe formal verification and other aspects, but this is something that will have to be discussed and voted on, but especially in the early years, you know, at least our entity thinks that that would be a good use of funds, but also there’s this idea that other projects can apply to the council for Melon tokens instead of running their own ICO or token sale because this further aligns interest and increases network effect. So, what we saw in the last two years is a lot of people coming up to us and saying, hey, we’d really like to build on Melon, but we need to raise money, so we’re going to do an ICO, and I found myself thinking this is a disaster, right? There’s just too many tokens in one ecosystem.
It starts to add friction instead of remove friction, which is what we’re all trying to do. So, if we can now say to people you can build your asset-management application on top of Melon, but instead of doing your ICO, why don’t you apply for some Melon from the council, and then that aligns interest because we’re all basically working towards putting users on this network, and this makes the network have more integrity and more features, which brings more users, and if we have more users, the token should have more purchasing power, and if we have a strong token purchasing power, the likelihood is the value of the token will be strong, which means that maintainers and developers want to earn in that kind of stable token or kind of valuable token So, yeah, that’s really the summary of how the inflation will get spent.
Laura Shin:
And you’ve also talked about token swaps and token mergers on Melon. How do those work?
Mona El Isa:
Yeah, so, it’s possible, unlikely but possible that one day we get a project which is of equal size to us or bigger that will say…or smaller but fairly big that will say, hey, you know, we’re interested in applying for Melon token, but actually, you know, you only have let’s say two million dollars’ worth of tokens left in your 2019 allocation, but our market cap, we’ve already done our ICO two years ago, our market cap is 15 million, we’re really interested, we see the value in aligning, we see the value in the synergies, we see the value in growing the network effect and so on and so forth, but you know two million Melon tokens isn’t going to cut it for us.
So, the possibility would be that, okay, we decide that in the case of a merger, for example, we decide that both entities or both protocols scrap their token, a new token is created, which can encompass both tokens, and that the sort of market caps, per se, are combined and remunerated accordingly, and this means that because everybody now has a new token, which is the same token that these two networks or two network effects, even, have now been combined into one, they’re bigger, they’re stronger, there’s more developers working on features, security, etcetera, and there’s more users. Now, this would only make sense if the dilution to both entities or both protocols was less than the value created by merging, but you can see scenarios…you can imagine scenarios where this might be possible in the future.
Laura Shin:
So, as far as I understand, once we kind of have like a number of funds that are using Melon that there will be a published ranking of their performance. Over what time period and how often will that updated?
Mona El Isa:
I mean the performances are all on chain, actually, so they, I mean, in theory you can pull out data for any timeframe and any ranking, and this is actually another benefit because fund managers really struggle to build audited track records which people can trust them with, you know, to invest substantial amounts of money in. So, from now on, at the very least, Melon can help a manager build an on-chain, totally audited and verifiable track record within a set of rules, which is pretty awesome. So, the front end now, the front end, in extracting that data for the blockchain is a little bit more complicated, and we are working on a tool which hopefully should be live in a few weeks, which will be able to track performance at least over 1 or 2 time periods, and hopefully over time we’ll make that tool more sophisticated.
Laura Shin:
And I want to also, then, ask a little bit more about kind of the structure going forward, because your co-founder, I don’t know, is his name Reto or Reto?
Mona El Isa:
Yeah. Yeah.
Laura Shin:
Reto, Reto Trinkler is starting up a new company, and at least for now, I think Melonport is hiring his firm, Trinkler Software, to do some work on Melonchain. So, what is that work, and then going forward, what will that relationship be between his company and the protocol?
Mona El Isa:
So, when Reto first left the company in May 2018, I think, yeah, it was May last year, the plan was that he wanted to do some research on Melonchain, a research and feasibility study. Shortly after that, he decided not to and informed the board that he no longer wanted to. So, actually that has been put on hold, and we instead, we expect the Melon Council to research that this year, over the course of the next 12 months. There’s actually no rush for it from our perspective because we’re not expecting V1.0 of the Polkadot until October this year, and certainly we won’t be rushing into anything until we’ve done our research on all the interoperability solutions, and we meaning the council, not just our team, but yeah, you know, we’ve got a little bit of catching up to do on all the interoperability solutions. We’ve got to see how they all pan out, how they come to the mainnet, how they’re used, how they fit our use case, and decide at the right time. I think it’s probably a little bit too early to make that kind of decision right now.
Laura Shin:
And we’re at this moment in time where there’s a lot of competition around the various blockchains that’s kind of heating up. Will Melon always be on the Ethereum blockchain?
Mona El Isa:
Oh, that’s a hard question to answer right now. I think that really depends. Ethereum, as far as we’re concerned, today is still the best blockchain to run a decentralized protocol on. Now, having said that, we’ve been pretty focused on building Melon on Ethereum for the last two years, and coming out with V1.0 and delivering our promise on time will now allow us to step back and revisit that assumption over the next few months and see whether we should be thinking in any other direction or whether we should be thinking to build a parachain or sidechain or whatever, but it’s very hard to say that right now because we’ve just come out of a two-year sprint where we’ve basically been focused on building Melon on Ethereum and not much else.
Laura Shin:
So, here you are at this moment. You’re about to launch mainnet. What projects do you have building on top of Melonport right now?
Mona El Isa:
So, there’s a few projects investigating. The only one I can publicly speak about is Ash Finance, so this is built by a team originally called Midas Technologies, and this is a team out of Germany that are building a gamification, a fund manager gamification app on top of Melon, which is pretty cool. It allows managers to challenge each other to battles. It has a mobile interface, and it’s going to be available in various app stores, and they’re coming out with their beta any day now, so I’m very excited to see that. They’re a team we’ve enjoyed working with. We’ve really enjoyed their enthusiasm and the fact that they jumped in so early, for better or worse, because, you know, they’ve done a really good job given how busy we’ve been, and they’ve done a really good job of independently working on this app without too much help from us. So, I’m really looking forward to seeing that, and hopefully we’ll see many more use cases coming after that.
Laura Shin:
Great. Well, where can people learn more about Melon?
Mona El Isa:
So, the best place is probably our Medium page, where we regularly publish blogs. We have a great YouTube playlist just out from our M-1 conference, which clearly, you know, the first set of 6 or 7 talks is clearly going through, walking through the entire Melon stack and then later on all the other kind of protocols and decentralized exchanges, etcetera, that were integrated into Melon, and the docs.melonport.com is a great resource for developers who want to get down and dirty with the code and see what we’ve done. We’d love to answer any questions. Our Telegram chat is always available and so is our Reddit channel on Melon project.
Laura Shin:
Great. Well, thanks for coming on Unchained.
Mona El Isa:
Thank you.
Laura Shin:
Thanks so much for joining us today. To learn more about Mona and Melonport, check out the show notes inside your podcast player. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review, and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn, and if you haven’t yet bought tickets to my live podcast recording with Vitalik Buterin in New York City, on March 20, you can do so now. Check out the link in your show notes. Unchained is produced by me, Laura Shin, with help from Raelene Gullapalli,Fractal Recordings, Jennie Josephson, Daniel Nuss, and Rich Stroffolino. Thanks for listening.
