It’s 19th June 2030. Sam pours herself a cup of coffee and starts to think about the day ahead. She checks to see if there have been any market developments since she left work yesterday. There were some breathless headlines overnight as BTC’s recent bull run took it through the $100,000 level, apparently in anticipation of the UK abandoning its fiat currency altogether following the recent, successful example of the Swiss. This was widely expected and hardly noteworthy in her opinion. News wise we were in the quiet summer lull.
She opens her Melon terminal to check her firm’s client dashboard. It makes for more interesting reading. She clicks on Cent’s Melon page to see who is the most tipped investment writer of the last 24 hours. The first indicator she looked at was her favourite Santiment’s ‘Crowd Bias Index’, an algorithm which tracks mentions of ‘buy’, ‘bought, ‘bounce’ and similar bullish keywords on crypto social media channels, and recently had a solid track record for gauging crypto sentiment and signalling trend reversals. The index had been making all-time highs in the past few days and typically was a sign of impending sell-offs (ironically, overwhelming crowd bullishness is often a profoundly bearish signal). It reminded her a bit of Bloomberg’s “Fear and Greed” index back in the day. Bloomberg, Reuters…she was once so dependent on these tools, almost completely replaced by crypto data sources like Messari and Santiment today. The firm she founded almost exactly around the same time she stopped using Bloomberg ten years ago now manages $50bn in client assets and counts pension funds, university endowments and insurance funds as her clients.
Her firm runs a range of different strategies, all using tokens and all enabled by blockchain technology. She checks in to the Melon Monitoring tool and recalls when she first read about Avantgarde Finance building this tool, which levered a combination of the Melon protocol and the graph protocol to build an on-chain reporting tool for funds, something that she found mind-boggling at the time. She checked her asset managers’ league ranking only to find that her flagship smart-contract insurance fund is now in the top 50 worldwide. Yesterday was the end of the quarter, performance and management fees should now be deposited in the fund’s wallet. She reminisces back to how complicated quarter ends used to be — so much time wasted on paperwork and briefing investors. Today things are so transparent and fully automated. She remembers how people laughed at her in 2020 when she pitched her idea for the first smart-contract insurance fund underwriting insurance premiums on slashing risk that delegators on staking networks are exposed to when using the Unslashed network. It had been so hard to convince people to take her seriously ten years ago. She scrolled down the rankings to see that the Axozen fund had leapt from 7th in the rankings to 3rd due to a phenomenal month. She was glad to see them doing so well given they’d also had a tough start getting anyone to buy into the idea of a crypto collectibles fund on Melon back in 2020. She clicked into their monthly on-chain report to see what had led to this high performance. Axozen’s strong performance seemed to be attributed to a combination of Axies and virtual reality land plots from Decentraland getting a lot of hype after a famous rap-artist mentioned he was going to bid for it.
In the end, she never did find those investors. She launched her fund with her own savings, leveraging the Melon protocol, the cheapest and easiest way to set up a fund on-chain. At the time of her launch (2020), the Melon ecosystem was running the first ever Crypto Fund Manager competition. The prize pool was close to $1million in 2020 for the best performing on-chain 12 month track records. Today, that prize pool is closer to $100 million and is structured in the form of seed capital by some of the largest for-profit Decentralized Autonomous Organisations (DAOs) who sponsor the annual tournament (including some of the pioneers in the field like the Da0, Moloch and Unidao). She really had been lucky to see all of this so early. Over time, continued steady on-chain provable performance attracted investors and clients, enabling her to set up and run her firm today.
She pulls up various charts on her Melon terminal showing the fund’s recent transactions, current portfolio allocation vs peers, investor flows and performance attribution data and wonders if recent team hires have damaged the team’s balance. She now takes a look at how her other funds are doing. Her second best performing fund Melonai has also been crushing it. She’s been crowdsourcing data from open information marketplace Erasure Bay and using it for her own on-chain portfolio.
Suddenly she’s distracted by a screen alert she receives, informing her that the verification process for a new customer has just started. She clicks the alert and watches as, over the next few seconds the Melon protocol goes through its paces: first verifying the client’s eligibility and digital identity using Iden3’s latest screening tools.
The client is now on-boarded and she watches as the tool helps recommend fund investments of interest, helps configure the client’s risk tolerance, desired account restrictions (no exposure to sub-investment grade corporate bonds, no portfolio duration greater than 2.5 years) and willingness to give two weeks notice before redemption.
By the time of her next sip, the client is on-boarded and invested. When she started in the business twenty years ago, it took months and required huge overheads to maintain the staff required to manage the client on-boarding process. Now it takes seconds and costs virtually nothing. She finishes her coffee, shuts down her terminal and makes her way to the centre of town. Today is the Melon Council DAO meeting, one of the most important events of the year. She was recently nominated by some of the fund managers to represent the network’s users and she’s feeling pretty excited as this is her first meeting as a member of the DAO. The Melon network now secures $4 trillion in crypto assets under management (5% of the world’s total asset management industry and growing fast) and counts 50,000 users. The hot topics this year will be an analysis of trading volumes on all the decentralised exchanges (DEXs); the Council is debating whether to continue maintaining all 20 or focus on the 80–20 rule; 80% of the volume comes from 20% of the exchanges. Deversifi and Kyber Network were at the top of the list in terms of volume rankings this year, with 0x close behind. Another big issue is inflation — now that the ecosystem has matured substantially, there is a user-led movement to reduce gas fees on the network. And also there’ll be the latest review of projects applying to the Melon Council DAO for funding. Who would have thought back then that a16z, Placeholder, Fenbushi, Coinshares, Dragonfly and Fidelity would all be sitting on the Melon Council DAO 10 years ago. She takes her notes, grabs her Aragon DAO voting key and runs to catch the elevator so that she’s not late.
None of this is as far away as some of you might think. The building blocks to asset management 3.0 are all being built right now. The Melon Protocol, the underlying infrastructure for on-chain asset management, was released to the Ethereum main-net in March 2019, it now has four projects building tools and applications on top of it, and a growing user base — currently 150+ active funds and nearly a quarter of a million USD’s worth of assets under management, with many more funds planning to come on line in 2020.
I think 2020 will be a critical year for crypto. Let me explain why. Normally, the market takes care of pricing things correctly. At the moment, however, this doesn’t seem to be the case with crypto. Some really economically sound token models are significantly (in my opinion) underpriced, while other questionable token models (and products) are massively overpriced, with prices over emphasising the value of the network. Frankly, I think that’s down to data, or the lack thereof, but I’ll return to that later. The reality is that current token prices tell us virtually nothing — partly because there is hardly any liquidity and partly because it’s too early to see usage pick up. In fact, current token prices are giving us negative information. One of my favourite examples is there are two DEXs (which I won’t name): DEX A and DEX B. DEX B trades more daily average volume and has a more sensible token model. DEX A’s market cap is more than six times higher.
The bad news is that this mis-pricing combined with some of the more questionable token models may be the death of some very good projects and teams in 2020 that are dependent on their token model for sustainability until the usage picks up. There’s not much that can be done about bad token models, except iterating on models. This is happening in some cases; sometimes token models are getting better, sometimes it seems they’re actually getting worse. The best of the models will probably find a way to reflect usage of a network into the value of a token without compromising network integrity or stakeholders’ interests. But 2020 could be the year that a lot of really promising projects fall by the wayside.
The good news is that the same risks described above also provide fantastic opportunities. The projects that do survive will be very well placed for the next decade. From where I’m sitting — there have never been more alpha generating opportunities for the taking. My outlook for 2020 will be that smarter investors will start to get involved and bring valuations to more rational levels. And for those who want to be part of the first wave of on-chain asset management pioneers and do it publicly, transparently and with full fund automation, on-chain price record and integration with DEXs — there’s always Melon.
But how do we get from here, where the foundations of asset management 3.0 are being built but still a little shaky, to the fully decentralised, democratised, and frankly more efficient world of on-chain asset management I describe above?
What I’m advocating is nothing short of system change — we need (good) projects to flourish and for this we need not only greater demand, but also the right enabling conditions, favourable legal and regulatory frameworks and new kinds of institutions and networks. Here are the key elements we need to start putting into place in 2020:
- Driving demand. Increasing adoption levels will be essential, especially in 2020. This means raising awareness of the benefits of on-chain asset management, showcasing good use-cases and ensuring that the technology is as safe and easy to use as possible. Adoption can also be encouraged via the right incentives. To that end, we’ll be making a very exciting announcement in 2020 — stay tuned!
- Funding projects to scale. Increasingly, more and more projects from the 2017 ICO wave are delivering on their promise from a tech-perspective, hitting main-net as promised. However, it is now time for those same projects to focus on driving usage on the networks. By funding solid token projects to accelerate UX/UI improvements, educate users and spread usage through distribution channels, investors can really help bridge the funding gap and earn attractive investment upside, as token values increase in line with greater adoption (this will be the case with well thought out token models).
- Data, Data, Data. The devil is in the data. One of the reasons why some projects are under/over valued is useless metrics being given too much weight — e.g. exchange listings, daily trading volume, venture funds invested etc. We also need a better way of assessing what projects have done versus what they have promised (signal vs noise), much better token modelling, comparison metrics and valuation frameworks. Most investors today invest after they’ve seen the traction and are too afraid to take a view on where the traction is coming from next. This is why projects like Messari are so important to the ecosystem.
- New regulatory frameworks — regulations for the off-chain world are not fit for purpose for decentralised finance. Decentralised technologies make some risks negligible (e.g. custody, risk management, fraud, embezzlement, delivery vs payment etc.). However, traditional law was designed on the assumption that technology could not mitigate or eradicate these risks — this needs to change. In particular, regulators need to consider accepting smart contracts in place of financial intermediaries.
- Safe spaces for experimentation and innovation. We need to be able to test things in practice but in a way which both protects investors, and engages regulators. The best way to do this is through regulatory sandboxes. We would urge regulators to provide more opportunities for such sandboxes and hope to test use cases in this way in 2020.
- Networks and organisations to champion on-chain asset management. It’s essential in such a fast paced yet relatively new field, that we have champions to raise awareness about the benefits of blockchain technology, work with regulators and grow the DeFi community. That’s why in 2017, we helped set up the Multichain Asset Managers Association (MAMA) to carry out projects, organise events and strengthen the community to help bring about a more appropriate regulatory regime for on-chain asset management. In 2020, MAMA, now at 60 members, will be bringing the first live use-case of Melon into a fully regulated environment, publishing a manifesto and leading initiatives at Oxford University, the University of Basel and the Frankfurt School Blockchain Center.
- Culture. If we want the field to grow and mature, we will also need to work together. This requires openness, transparency and spaces for collaboration. That’s why we organise an annual on-chain asset management conference to bring ecosystem participants together: the first ever, M-0, was held in Zug. Its success was followed by M-1 (also in Zug) and the next (M-2) will be held at Oxford University in 2020.
And if we do all of this, where do we get to?
The ultimate prize is truly democratized asset management. Generally speaking, the entire investment industry has suffered for far too long as a result of high barriers to entry. This means that once you pass a certain threshold of size, you no longer have to be too concerned about performance because investors usually care about size first. Institutional investors are highly unlikely to back anyone with less than $200m AUM and less than a 2 year audited track record. Since the cost of survival beyond a year is typically about 200m AUM — this creates a chicken and egg situation and may explain why discretionary managed investment products struggle to outperform passive investments.
The idea that anyone, anywhere, regardless of background, age and education can now set up an on-chain investment fund, with a fully transparent performance track record over time, with close to no capital is staggering. By having large, sponsored prize pools associated with this effort, we can imagine a whole range of exciting nascent web3 investment products becoming available, coupled with talented managers building those projects. What we’re really excited about is being able to unlock the talent that has been hidden in the shadows for far too long and seeing it breathe a little freshness into some of the complacency we see in investing today.
This piece was originally prepared for Bitcoin Suisse’s Outlook 2020 Report. If you’d like to read the full report online, it can be found here.