The problem we set out to tackle
Over two years ago, the idea for Melon (μέλλον; the greek word for future) was born; a vision to remove the many costly layers of third-party intermediaries and middlemen whilst fostering a healthy, working and reliable alternative basis for a future financial system. We tackled asset management, one of the largest areas in the industry and one which touches virtually all areas of finance. We chose this segment because we had substantial experience in asset management and an understanding of its friction points.
In spite of the costs, third-party intermediaries have always been essential. The need to have a “neutral”, “trustworthy” and “reliable” actor to “oversee” each transaction has been a fundamental necessity until now to ensure that all parties comply with their obligations once a transaction had been agreed (e.g. the seller handing over shares to the buyer; the buyer handing over cash to the seller; the record of changed ownership of the shares being accurately recorded; settlement of the cash transfer being made promptly; ensuring that each side is legally allowed to participate in the transaction; et cetera, et cetera).
But this loose network of legal and operational “validators” has often become unstuck. Every few years, the financial industry is hit by a large error or, worse, frauds which have significant and profound ramifications for financial actors. Some of the most notable examples include Lehman Brothers, Madoff and Bayou. But every week sees smaller-scale frauds, which may be less high-profile but are no less impactful for the victims.
The problem is nearly always the same.The opacity and complexity of the layers upon layers of administrative middle-men creates an environment in which frauds are made possible — if not directly enabled. These kinds of incidents are facilitated by the lack of transparency when moving assets around and/or a failure to spot an error due to weak processes. In some cases this has meant that mistakes and fraudsters were not caught early enough, allowing the build up of paper losses to be so high that the ripple effect hurt many innocent end-savers who had nothing to do with these issues.
One of the most baffling things is that none of these issues have been adequately addressed over the last few decades by significant advances in technology. Indeed, over the last century, various technologies have disrupted numerous industries, facilitating dramatic improvements in performance and cost. This has not happened in asset management, or the financial services industry more broadly. In fact, quite the opposite. As technology has advanced the unit cost of financial intermediation has continued to rise.
We think this is because the underlying financial infrastructure is made up of a 30 year old technology stack which has not been updated since it was introduced and is therefore unable to get much benefit out of new technologies. As a result, we have been stuck in Asset Management 1.0, while all most other industries have leaped forward in efficiency due to technology advances.
Hopefully, the remainder of this blog will demonstrate how blockchain technology finally enables the asset management to leapfrog towards a new underlying infrastructure for financial services which makes things like automation, transparency, self custody and efficiencies all possible.
Blockchain technology opens up the potential for a brand new infrastructure to be built, one that offers almost all the qualities we would look for when re-imagining what a new infrastructure should look like: transparency, almost-immediate trade settlement, a possibility to code in conditions and parameters (compliance, operational, risk management automation potential) and a possibility to enable self-custody at all times. This is the promise of the Melon protocol. It isn’t perfect today — but the promise of a better financial future is now here as long as scalability, interoperability and good governance are achieved. The potential of this technology when it comes to financial services is mind-boggling.
This gap in terms of what currently exists and what blockchain technology promises, could allow the industry to leapfrog from Asset Management 1.0 to Asset Management 3.0 whilst completely skipping any middle ground which could have been achieved at the margin in the last couple of decades with new technologies. This reminds me of how some countries skipped fixed line and jumped straight to mobile… or how solar panels are becoming more mainstream in remote African villages than anywhere in the developed world. Is this just a precursor to what’s about to hit finance? We think so. When we say 3.0, it’s to emphasize the magnitude of the leap we think is about to happen in the financial services industry.
At last, we can break the upwards trend in costs and automate processes with an increased amount of precision and transparency to investors, savers and regulators, to help hold financial participants who are given the responsibility to look after other people’s assets accountable for their actions.
Finally, we can also provide an alternative to users who can only hope that the existing financial system doesn’t mess up again, while knowing that ultimately they will bear the burden if it does: bail-outs, invisible taxes (quantitative easing), loss of assets etc. After all, why should the end-saver pay? And why should they hold all their eggs in one basket from a risk perspective?
As we started our work, we realised that errors or frauds in the system were often revealed and even magnified by inflations of credit, and compounded by the related and well-documented problems inherent in a fractional-reserve system of banking. But while we were aware that the problem of so-called “duration mismatch” inherent in such a system (i.e. banks lend long-term but borrow short-term) has been the root cause of financial instability and a driver of nearly every financial crisis in history, we didn’t fully appreciate what this had to do with the tech we were developing. Now we do, and we are excited about killing two birds with one stone.
We believe that the technology we are building, combined with other players in the field, has the potential to solve the problem of duration mismatch and completely mitigate financial crises by enabling portfolios of perfectly matched durations to be created. Furthermore, intermediate liquidity problems requiring lenders to call back their loans could now be removed since it’s now possible to trade tokenised deposits on a secondary market. This has never been easier than now. One only needs to look at the work bZX network is doing with iTokens for example to get a glimpse into the realm of possibilities.
It’s just the beginning, but all the building blocks are now coming together. A decade or two from now, it is likely that we will live in a world where diversification isn’t about ‘how many custodians have you spread your cash with?’ (e.g. UCITS law) but rather ‘how diversified are you between traditional financial services backed by governments and central banks vs holding custody of your assets using technology?’
Whilst we have been pushing this vision for several years now, it was a big moment for me personally to see the FT’s David Stevenson predict a similar future in his article on ‘How blockchain can help disrupt the fund admin chain’ on 4th February.
This marks the first time a reputable financial publication makes such a forward thinking comment on the future of finance and personally, I am very excited about the snowball effect that is coming.
What we have achieved in the last two years
Two years ago we promised to develop the smart-contracts and accompanying front-end to the Melon protocol which would enable users to set up, operate, manage and invest in crypto funds in a completely decentralised way. We commit ourselves to an initial set of features and we delivered them. We also promised to complete two audits. I am pleased to say we have accomplished all of the above and included more features than initially planned. Along the way, we also found better ways to do some things and adapted quickly. A special highlight for us is that aside from carving out our own niche in Asset Management 3.0, we also contributed to bridging the overall decentralised asset management ecosystem by integrating 0x relayers, Oasis Dex, Ethfinex and Kyber Network as exchanges. A full comprehensive run-down of our v1.0 main-net release can be found here and a preview demo of the front-end can be viewed here.
Furthermore, we believe we have designed one of the most exciting mechanisms for a DAPP-protocol utility token so far; a “buy and burn” model which has the benefit of directly linking usage of a network to the purchasing power of the utility token — in our case, MLN. By having a fixed inflation pool (300,600 MLN per year) we are also able to align incentives across the network and spur future growth, innovation and network effects. An exciting example of this is the work that Ash Finance has been doing in building a mobile gamification app on top of Melon. Ash recently announced they were cancelling their ICO in favour of applying to the Melon Council for a MLN grant. Other application use cases could one day include insurance, pension funds and VC. This has also played in nicely with our chosen governance model and enabled us to look after two of our main stakeholders:
- Token holders. MLN tokens were designed to be utility tokens. Through our Melonomics design and implementation, token holders now have a direct way of benefiting from the increased usage of the network.
- Future maintainers and developers of Melon. These are essential to the growth and success of this new infrastructure given how young and experimental this technology still is. There is much work to be done. The only sustainable lever we have to compensate the network maintainers and future developers is the Melon token — and the purchasing power of these tokens is now directly linked to the value creation they bring to the network through Melonomics too. This neatly aligns incentives on several fronts.
Another group of stakeholders which are essential to the growth of Melon, and were under-represented in this model, were the users themselves. We have addressed this too with our multi-stakeholder governance model. The Melon Council (the new decentralised organisation which is responsible for the future development and maintenance of the protocol) consists not only of those with the necessary technical skills, such as developers and auditors, but also importantly, the users themselves. This will give the users some influence over the future of Melon. Let’s face it, without users — what’s the point of all these protocols? Without a doubt, the next phase in our journey will need to cater to their needs and priorities.
Handle with care
And with that, Melonport’s job is done! We’re handing over the Melon protocol to the community — it’s now theirs to embrace and we hope they enjoy discovering the benefits of Asset Management 3.0. At the same time, however, we don’t by any means claim to have a “production ready” protocol — on the contrary, any complex blockchain technology is to be treated with exceptionally high care in the early years. Inevitably, there will be bugs that will need to be fixed, challenges that we will face and some things will go wrong. But these will ultimately make the protocol better. If you want to have a glimpse into the future, now is the time to get involved and start playing around cautiously. We feel we have put in place a very talented and diversified inaugural Melon Council and with guidance from future Melon Exposed Businesses, the Council will do its best to focus its efforts on security and features that will benefit the users.
Thank you’s and goodbye as Melonport
We’ve been told by auditors that the Melonport protocol is one of the most complex to ever hit the main-net and this is quite overwhelming.
But it also makes us feel proud. In February 2017, we set ourselves a two year deadline and many things didn’t go to plan. Sometimes people or events let us down, sometimes we made wrong decisions and other times matters were simply out of our hands. In short, it hasn’t been easy. On the flipside, all the mistakes and let-downs have made us stronger and anyone or anything that made our life difficult needs to be thanked too for teaching us valuable lessons.
I’d like to make a special thank you to our community who have been incredibly forthcoming with their feedback and enthusiasm and supportive during both the good times and tougher times. Other special thanks also goes to the Canton of Zug who have made our stay in Zug effortless from a business & networking perspective and Hansjoerg Hettich who has done an exceptional job leading the regulatory efforts through the Multichain Asset Managers Association (MAMA) which is starting to bear some fruit for the on-chain asset management ecosystem.
The people I want to thank the most though are the Melon team members that have seen things through to the very end. I am so proud of you all for helping this vision become a reality. I am so proud that we are delivering a protocol to main-net with all the features and functionalities that we promised and more — on schedule. I know that’s only possible due to the hard work, dedications and sacrifices you have all made.
Where we go from here..
The journey is still a long one and I am the first one to say that this is just the beginning. But with the Melon v1.0 release, we just helped raise the bar a little higher in finance. Together with other wonderful projects in the ecosystem we contributed our part towards this vision. It’s certainly not over for us. However, most of us will take a much needed break to recharge our batteries and regain some perspective. Later this year, we will launch a new project which will continue to build on Melon through our new entity — Madeeba Ltd — which holds one seat on the Melon Council .
Madeeba Ltd (placeholder name) will be building an application layer on Melon which will enable users to enter a one-stop shop for asset management without necessarily being aware that they are using blockchain technology.There are many issues we will need to address from the back end (scalability, security) with the Melon Council, to UX (improving the experience) and regulatory hurdles. The journey is still a long one, but chapter two is beginning and the road ahead is looking very exciting.