Mona’s Melon recipe for the future of Asset Management on Blockchain

It is going to be a juicy one, I promise! I will encourage you straight away to contribute with your comments and questions. The idea is to co-create a recipe that will lead to the best possible future for asset management.

Rather than giving you the full background to the problem, I will direct you to this brilliant talk “The Uber Moment for Asset Management” by Dr. Bolko Hohaus in which he explains in detail how outdated, inefficient and slow the infrastructure is. There are layers and layers of legacy technology. Coupled with extremely high fixed and variable costs, and a very difficult market at the moment, it is no wonder that even hedge funds find it tough to beat their benchmark!

Do you know that, just to break even, asset managers need to have at least $150m under their management and charge 1.52% in management fees per year? From the investor’s perspective, it means that 1.5–2% of their net return is wiped away through the costs structure.

Melon: a blockchain platform for asset managers

Let me introduce Mona El Isa, Co-founder of Melonport AG, a Swiss company building Melon — an Ethereum based software for asset management. I met her at Blockchain Expo in London last week. Mona is a very inspiring person pursuing her vision. (All I can say, it is a compelling one!) She left her job in asset management more than a year ago in order to find a solution to all the aches and pains of the industry.

Mona and I discussed how Melon, as an open-source blockchain platform, can enable fund managers to introduce more transparency into the whole system, increase their efficiency, and dramatically reduce the costs of auditing, booking, reconciliation and settlement; whereby the barriers of entry for asset managers would be much lower, and smaller investors, like you an me, would also be able to participate. (The last point was of a particular interest to me! I will tell you why later!)

Melon Token (MLN) Crowdsale: 15 Feb 2017

Melonport has already announced the Pre-sale of their token (MLN) on 15 Feb 2017. You can find more details about it on Medium, including the roadmap. There will be two token sales in total, and they will fund a two-year development.

The recipe:

Now, the interesting bit! How is it going to work in practice?

Anyone who intends to manage assets, or a hedge fund, or a portfolio on a blockchain will be able to use Melon software and pay the licensing fee in Melon tokens. Since the software is built on Ethereum, accounting and security are automatically taken care of. Additionally, smart contracts will stop any fund embezzlement or manipulation by fund managers via preset rules.

Within a year, Melon will provide the first live release of a user-friendly interface and the core tools for setting up a fund falling into the following five modules: price feeds, asset universe, exchange, risk management, and performance and management fees.

As far as the advanced features are concerned, e.g. risk calculation, KYC and AML, they will be created by developers who will be compensated for their effort in Melon tokens. This is an opportunity open to all developers. Melon is an open-source software and everybody is welcome to contribute by improving the code and adding extra modules.

That first version of the software will support only crypto managers by enabling them to trade all ERC20 tokens. Although most bankers still dismiss crypto as a real asset class, Mona believes that crypto IS the next asset class — fast growing and unique! Mona’s view is that — despite their high volatility — the returns on Bitcoin, Ether and some of the Altcoins, indicate that crypto should be included as at least 1% of any portfolio.

In the second stage of Melon development, Mona and her Co-founder Reto Trinkler — who, by the way, I hear is an amazing blockchain developer — will concentrate on automating reporting to the regulator, and risk management and compliance. Thus, blockchain technology will eliminate the need for anyone policing over these processes.

Personally, I was interested in digitising and trading my collection of sneakers. Mona assured me that it would certainly be possible at a later stage of development. You might cry-laugh at the idea, but I learned the other day that the secondary market for collectible shoes in the US is valued at $1.2bn. It is mainly attractive to young audience because it is a mobile-first market, and a quick flip comparing to, let’s say, art collections. Makes sense to me!

Since more and more assets are being put on blockchain every day, Mona expects that within five years pretty much all assets will be collateralised. In the meantime, Mona wants to ensure that Melon is capable of enabling the users to build a well-diversified portfolio with a wider range of assets than in any bank portfolio today. (Hence, I will be able to add digital tokens, intellectual property, wine, real estate and maybe some stocks to my collection of vintage sneakers:)

Different types of assets will be on different blockchains. Moreover, there will be many wildly different blockchains in the future: some private, some public, zeroknowledge proof chains, JP Morgan blockchain, Monax blockchain, Hyperledger, super-fast blockchains, and so on. They will match different requirements: for instance, a high frequency fund will require a super-fast blockchain.

Therefore, there will be a need for all these blockchains to communicate between each other in a decentralised way. Think of it as an ‘Internet of blockchains’! Mona and Reto are considering Polkadot as a potential solution. In case you would like to know more about Polkadot multi-chain framework and how it will enable interoperability and scalability for various different blockchains, I would suggest that you watch Berlin Parity Ethereum video — Gavin Wood will fill you in on the details! (Skip straight to 20:00 min!)

Get involved!

Not only will developers earn Melon tokens for creating extra modules, but also for implementing Melon code on other future blockchains.

There are also opportunities for others to get involved. Melon would love to partner with fund managers or developement teams who want to set up a fully regulated fund on blockchain. Via smart contracts the transparency, tracking and reporting requirements of regulators can be made so much easier! Mona explained to me that the first mover would require capital and determination, but could potentially receive a licensing fee for life because once the requirements are approved, they will exist on their open source protocol, and all other users will have to pay for it with Melon tokens.

Another opportunity for co-operation is in the area of compliance with AML and KYC regulations. Therefore, Melonport needs an identity management partner, either a bank, an institution or a newer fintech player in the field! If interested, please contact Melonport directly!

Final thoughts

I agree with Mona’s opinion that clients expect different types and levels of financial services nowadays. After all, every other single industry has already been dramatically changed by technology. As much as the change is disruptive, it also enables us to come up with new and better business models and services.

I would like to know what you think? Is the time ripe for a fund in the form of a smart contract? Do you have any concerns regarding the security and governance? Would you like to be able to manage your own portfolio on blockchain, invest in other portfolios, or have others invest in yours? Will it help us all to learn how to manage our assets better?

Mona is convinced that blockchain is a major efficiency opportunity for asset management as it allows us to build a much cheaper infrastructure and save money on audits, risk management and reporting processes, compliance, as well as trading, reporting and settlement.

Once it has been built, asset managers will be able to charge close to 0% for their management fees. This is very good news for pension funds! At the end of the day, the savers will benefit. The savings will be passed onto them. If, for instance, a fund manager makes 6%, the savers will be able to keep all of that money!

I really enjoyed talking to Mona. Melon is a huge project with a lot of potential. I will do my best to answer your questions and comments, but Mona herself is also happy to engage in the conversation.