Melon Council comments on MIP#7

Intro

The Melon Council has been working on assessing the viability of Melon Improvement Proposal #7 (MIP#7) and would like to share some initial feedback on the proposal submitted on June 25th, 2020 by Tom Shaughnessy (Delphi Digital), Ceteris Paribus and Chris Manessis (Moonchain Capital).

What is MIP7?

As a reminder, the proposal takes a closer look at the Melon token economics (Melonomics) and lays out arguments to reconsider the value accrual mechanism. In particular, it argues for a value accrual mechanism that is directly linked to growth in the Assets Under Management in Melon Protocol funds vs. the number of individual Melon Protocol funds. Crucially, it also argues for removing any fee at fund “set up” to entirely remove any friction for new users entering the platform and deploying a Melon fund on the blockchain. It also proposes to give holders of MLN discounted fees on the protocol and there is a line of argument made to commit towards reducing inflation in later years.

Removal of the set-up fee

Our internal analysis has shown that for the set-up fee to accrue any real value to the network over time — fund set-up fees would have to go up. This would only serve to increase the barrier to entry which would be out of line with our fundamental goal to empower and enable the long tail of managers and their investors.

Therefore, we believe it makes sense to remove the set-up fee if there is a viable alternative that can better align stakeholder interest.

Moving towards an AUM based fee

MIP#7 also puts forward a view for a 20bps recurring fee on AUM. In the last year or so, protocol development has come dangerously close to halting because of a token price that was too low to sustain the maintenance and development costs. It is only because of the personal capital (either in the form of investment or salary reductions) risked by contributors to the ecosystem that Melon is still around and thriving as a project today.

We acknowledge that Melonomics is probably at least partially to blame for some of the challenges the protocol faced in the last year. In order to accrue value on a forward-looking basis with the current model we would need to increase the AMGU price substantially from where it is now. Given that Melon’s core proposition has always been about empowering the long-tail, we feel that it would be wrong to stunt up-and-coming managers by providing such a barrier to entry. Our preference is to grow with our users. If they are successful, Melon will be successful.

We have always said that for a strong ecosystem to thrive, we need to make sure that developers, maintainers, users and token holder interests are all strongly aligned.

At the same time, we want to emphasize that the single most exciting thing about Melon is that it empowers the long-tail of fund managers and investors in asset management — a market that has never been served before.

With that in mind, if the choice between accruing relevant value to the network is between increasing the set-up fees in the order of 10–15x or imposing a minimal AUM-based fee would be in favour of the latter, which allows the network success to grow alongside user success.

Having said that, the Council is in favour of an AUM-based fee but will not exclude the option of giving a choice to the user of either an AUM based fee or a much larger “set up” fee, which can each help achieve the same value.

Caveat: There has been some discussion over whether an AUM-based fee should be charged to the fund or to the manager. We believe this topic should be explored further, and it is not something we reached consensus on in our initial meetings on the topic.

Fees on investment

A fee on investments seemed to be taken negatively by the user community. There have been some suggestions to remove this altogether and replace it with a higher fee on redemption and the Council thinks this could be a better direction.

Holding MLN as entitlement to a discount on the network

In principle, we like this idea very much, but before committing to something like this we want to explore other routes, such as for example; referral programs. We are currently researching these alternatives and others that have been suggested by the community and internally in our discussions.

Reducing Maximum Inflation

It is hard to make predictions about when future spending might peak. The priority is to get the protocol in a mature and stable state before formally committing to reduce inflation. Some signs of that would be:

• Less frequent protocol upgrades
• Reaching 10,000 users
• Reaching $1 billion in AUM

With that in mind, we want to confirm that the Melon Council is committed to reducing the available inflation pool when such signs are visible. We can commit to re-accessing the above metrics and communicating regularly on our thinking if it changes. The Council does not carry tokens over from year to year. If there are unspent tokens left in any given year, they are typically burnt.

Concluding Comments

In summary, the Melon Council supports all the general ideas in MIP#7. The exact details on how these get applied will depend on further analysis, feedback and input from user representatives on the Council and a technical assessment that will take place before implementing these details.

Note: The vote for user representatives of the Melon Council is currently ongoing — if you haven’t yet voted, join the user-only channel from your Melon fund (admin page) and get voting!