The aim of this blog post is to succinctly explain what Melon is and how it works in a reasonably non-technical manner for those of a financial background. It will also provide simple definitions for some of the technical terms that shouldn’t be avoided, and will act as a staging platform for those who wish to dig deeper into the complexities of the system.
*The following content is subject to change as thinking and protocol design evolves over time. This is a living document, and any feedback is very much appreciated!
So, let us begin our journey down the rabbit hole…
Description
In the simplest of terms, Melon can be thought of as a system of tools that enables participants to set up, manage and invest in digital assets and have management strategies that exist within a customisable, predefined ruleset. The system itself is decentralised, and minimises the requirement for trust.
You can imagine it as a toolbox for anyone who has access to digital assets that require management.
Components
There are several important components that make up the Melon system:
- The Protocol: The agreed logic behind the system of tools, consisting of a mandatory “vault” that securely holds digital assets, and optional “modules” that allow Melon funds to meet the differing needs and requirements of individual fund managers. Once the vault and modules are assembled together, they form a Melon fund.
- The Portal: A graphical user interface in your browser (Chrome, Firefox etc) that allows participants to access and interact with the protocol.
- The Melon Token (MLN): Gives protocol design rights to participants in the Melon ecosystem and acts as an incentive mechanism for those participants to continue engagement over time.
- The Ecosystem: Made up of all the differing participants and technologies that interact with and are affected by the Melon system.
Definitions
Before we forge ahead, here are some simple yet important definitions (feel free to skip ahead if you already consider yourself a blockchain wizard):
Protocol
A protocol can be thought of as an agreement between participants in a system on a standard way to interact with each other. A good example is SMTP, the standard email protocol that allow us to send messages to and from each other.
Cryptoeconomics
A formal discipline that studies protocols governing the production, distribution and consumption of goods and services in a decentralised digital economy. Cryptoeconomics is a practical science that focuses on the design and characterisation of these protocols. Vlad Zamfir, Researcher — Ethereum Foundation
Blockchain
A blockchain is a magic computer that anyone can upload programs to and leave the programs to self-execute. The current and all previous states (history) of every program are always publicly visible, and carry a very strong cryptoeconomically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies. Vitalik Buterin, Chief Scientist — Ethereum Foundation
Smart Contract
Smart contracts are contracts with the terms directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralised blockchain network. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible where appropriate. Investopedia
DApp
DApp is an abbreviated form for decentralised application. A DApp has its backend smart contracts running on a decentralised peer-to-peer network. Contrast this with an app where the backend code is running on centralised servers. A DApp can have frontend code and user interfaces written in any language (just like an app) that can make calls to its backend. Furthermore, its frontend can be hosted on decentralised storage such as Swarm or IPFS. Joseph Chow, Developer— ConsenSys
Web 3.0
A reimagination of the sorts of things that we already use the Web for, but with a fundamentally different model for the interactions between parties. Information that we assume to be public, we publish. Information that we assume to be agreed, we place on a consensus-ledger (blockchain). Information that we assume to be private, we keep secret and never reveal. Dr Gavin Wood, CTO & Founder — Parity Technologies
Protocol Token
Digital tokens that are governed by a coded protocol. The rules of the protocol are enforced by the underlying blockchain technology. They are generally not linked to any “centralised” entity or any “traditional” real-world assets. Mona El Isa, CEO & Founder — Melonport
Traditional Asset Token
Digital tokens that represent a “traditional” asset, such as collateralised fiat currency (e.g Tramonex’s GBP token on Ethereum, Decentralised Capital’s Euro token), or precious metals (Digix’s token representing gold), or company equity (Otonomos & t0). These assets are still dependent on traditional financial and legal systems. Mona El Isa, CEO & Founder — Melonport
That concludes the important definitions, now let’s continue with Melon itself!
The Protocol
The Melon protocol is a collection of smart contracts that form a blockchain-based protocol for digital asset management. It is initially built on the Ethereum platform, but will be available on many blockchain platforms in the future. It enables participants to set up, manage and invest in digital asset management strategies that exist within a customisable and predefined ruleset in an open, competitive and decentralised manner. Melon can be used to manage both the newly emerging asset class “protocol tokens” as well as traditional assets that are starting to migrate across to blockchains as “traditional asset tokens’.
In more detail:
1. The Melon protocol allows a fund manager to set up an asset management fund with predefined parameters at a much reduced cost compared to traditional fund structures. These parameters are dictated in smart contracts and enforced/secured by the blockchain protocol on which they reside.
2. It ensures that the manager operates the fund within those specified parameters, protecting investors from many potential issues that are prevalent in traditional fund structures. In a way, you can think of the protocol as being technology where, when specified, regulation is adhered to by default (for more information on this, check out our “Hedge Fund Scandal” series Part 1 & Part 2).
3. It lowers barriers to entry making it inexpensive and much simpler to set up a fully audited, transparent fund on the blockchain. Standardised fund calculations make it easy to build and share the fund’s track record and track tax requirements.
4. Allows you to invest in other funds, or allow others to invest in your fund. Participants do not necessarily have to know or trust a fund manager in order to manage their money — managers are totally bound by the specified parameters of the Melon fund.
Vault
Each fund structure consists of a non-negotiable “vault” (which becomes custodian), and a optional “modular” element.
The standardisation of the vault in every Melon fund is what allows for the real time fund calculations and audits to occur. Also, the vault acts as a foundation for modules to be built upon, as each module will be compatible with every vault, and every Melon fund by extension. The vault is designed to be extremely secure, and keeps the potential attack surface for Melon funds as small as possible.
Modules
No two funds are the same, and the modules that plug into the vault are what give Melon fund managers the abilities to meet the individual needs and requirements of each fund.
The module classes are broken down into the following themes:
- Data Feeds: Serves real-world data for fund calculations
- Universe: Pre-defines a set of assets the fund manager can trade in (such as digital tokens like Augur Rep)
- Risk Management: A set of rules to restrict a fund manager’s behavior
- Exchanges: Connect the fund to different public exchanges for trading purposes
- Rewards: Setting management and performance fees for the fund
- Participation: Invest/redeem
- Compliance: Allows funds to easily comply and meet requirements for various jurisdictions
So, by assembling a collection of these modules together with a vault, you have a fully functioning, smart-contract bound asset management fund. Investors can review the fund’s smart-contract modules and decide whether they are happy with the rules to which the fund manager is bound by, before investing.
Useful Links/Further Reading
- The Melon Green Paper (Like a white paper, but not)
- Github repo for the Melon protocol
- Latest release of the protocol
- Melonport blog
- The Difference Between Traditional Asset Tokens and Protocol Tokens
The Portal
The Portal is a web-based graphical user interface that can be used by Melon participants to easily access and engage with the smart contracts that make up the Melon protocol. It can be thought of as a decentralised application, or DApp. The Portal allows participants to set up their fund, select the modules of choice, then deploy fund structure to the Ethereum blockchain. Once deployed, the Portal can then be used to manage their fund as is required, such as buying and selling assets for the fund to manage, or investing and redeeming value held by the fund.
It works by connecting directly to the Ethereum blockchain, which is why users still require access blockchain clients.
Participants plug their blockchain clients into the Portal (Such as Parity, Geth, MetaMask etc) which then allows them to interact with it as is required. What’s interesting about this is that the portal is really just a visualisation of the data that exists on the blockchain combined with a bit of wizardry that helps execute the Melon protocol smart contracts based on the fund managers desires. It is the blockchain clients (and therefore the user) who is always in full control of the management activity — there is no requirement of trust from us!
White Label
While the Portal is a significant part of Melon, any entity that wished to plug into the Melon protocol could feasibly create their own “version” of the Portal that could be better tailored to the specific use case of the type of fund(s) they wish to manage.
Should they wish to, companies can use their brand and their reputation to white-label the Portal, perform their own security audits, customize any additional bits they may need and provide any additional off-chain services for scalability of privacy. A permissioning layer may also be added, if needed (e.g. KYC/AML). This is the beauty of open source software, and will help with Melon’s compatibility with permissioned and consortium focused blockchains.
Useful Links/Further Reading
Ethereum Client/Browser pages
- Parity Ethereum Client download page
- MetaMask download page (Chrome browser plugin)
- Mist download page
The Melon Token (MLN)
The Melon token “MLN” is a core component of the Melon protocol, and is designed to provide a “usage and political right” to the Melon software. The token itself is a smart contract that lives on the Ethereum blockchain.
Melon token functionality
Political
- Voting on monetary policy: Whilst Melonport will determine the initial inflation rate, token holders should have a say in adjusting MLN inflation up or down (within a range).
- Voting on technical design: Anyone can propose a new technical design to modify, add or remove elements from new versions of the protocol. Token-holders and investors will have a say in whether new versions are added or not.
Usage
- In terms of usage functionality, transaction (licensing) fees will initially be set at zero with the possibility for token holders and investors to later to vote on introducing fees.
- Any performance or management fees earned by the Manager will require a conversion into Melon token before they can be paid out to the Manager. This would mean that Managers could use the Melon protocol for free, but would need to use the Melon token to withdraw any earnings. A more in depth blog on invest/redeem (participation)is planned for coming weeks.
Issuance
A maximum of 1,250,000 “MLN” will be created during the contribution periods before the protocol is deployed to the live network.
After the completion of the 2 year development workshop (~Feb 2019), either the MLN token will be disinflationary, or potentially the proceeds of the second contribution period will be used to fund the ecosystems activities on an ongoing basis (including module development), meaning inflation would not be required. This is yet to be decided, and we are researching both options to see what would be best for the long term success of the Melon ecosystem.
Distribution
40% issued in Feb 2017 Contribution Period, 40% is expected to be issued in 2018 Contribution period, 12% held by founders, advisors and partners, and 8% held by Melonport AG.
Useful Links/Further Reading
- Melon Token Smart Contracts
- Melon Token Contract Address
- ERC20 Token Standard (of which Melon Tokens adhere)
The Ecosystem
The Ecosystem encompasses… Everyone, even you, the reader! We see anyone and anything that interacts with Melon in some way as being part of the ecosystem. Of course, some entities are much more prevalent than others, but our goal here is to keep it as open and as accessible as possible for any value creators who may wish to get involved as a participant.
In this final section of the Melon explainer, we’ll talk about the participants in the ecosystem now, and how that might look in the future.
Melonport AG
Behind Melon is the private company, Melonport AG. Melonport is building the open-source Melon protocol, Portal, and is the issuer of the MLN Token. It is also responsible for providing ecosystem and community support, such as starting and maintaining social events and forums, or even assisting budding module developers in getting their modules ready and audited for usage by fund managers.
Fund Managers
These are the people/companies/foundations etc that put together Melon funds and manage various assets within them. They pick and choose the right modules for their usecase, and compete against each other (if they wish to) for a position on the Melon fund leaderboard. They will be Melon token owners so that they can use Melon for their requirements, and may also wish to use the tokens to vote on the future of Melon itself.
Module Builders
Module builders put together tools for funds to use. For example, one module builder might be a technically capable law firm who puts together a module for fund compliance in Singapore, another builder might represent a decentralised asset exchange, and provides a gateway for Melon fund users to trade their assets through their order book. They receive Melon tokens based on the usage and complexity of their modules.
Related Companies/Entities
These are groups that provide additional support or services to the Melon ecosystem, but not necessarily as module builders or fund managers. An example could be Parity or MetaMask, who both provide Ethereum clients that allow users to plug their Ethereum accounts into the Melon portal, and manage their funds that are held in the protocol. Another example could be Oyente. Oyente is a tool for finding bugs and security issues in smart contracts. Melonport is currently funding Oyente as a side project for both module developers and the Ethereum community as a whole to use.
Feedback?
As previously mentioned, this is a living document, and we will continue to update it as Melon evolves over time. If you as a reader have any particular feedback about the way this has been written and would like to help us improve it, please contact us at team@melonport.com — we’d love to hear from you!
George Hallam
Before joining Melonport as Head of Business Development, George previously worked with the Ethereum Foundation starting as Business & Partnership Director in Mid 2014. He quickly established himself as a key communicator, moving to the role of Head of External Relations where he successfully advocated the Ethereum platform to the world and coordinated the Ethereum Foundation’s yearly developer conferences in London and Shanghai. During his 2 years at the Ethereum Foundation, George grew a strong appreciation and understanding of the Ethereum community and the ecosystem it inhabits.
Twitter: https://twitter.com/GeorgeAHallam
LinkedIn: https://www.linkedin.com/in/george-hallam-a5002979/
Learn more about Melonport: https://melonport.com/
