I confess that I hadn’t been to Zug in 2017 and I grabbed the opportunity of the Crytpovalley meetup last Thursday at GG6 with its catchy topic “Crypto Valley – A better Silicon Valley?”. Max Wolter and Alexander Bremin, have captured moments about the people that have made and continue to make Crytpo Valley in Zug a unique and vibrant place. Read more in Alvalor Mission to Crypto Valley – a tale of the big world of crypto around the little town of Zug and about the many amazing people who make this place a reality. From Bitcoin Suisse, one of the first startups in Zug before Crypto Valley’s birth; to Monetas, one of the instrumental ones in nurturing the Crypto ecosystem in Zug, all the way to Søren Fog, founder of the Crypto Valley association and the crypto-expert legal partners MME.
The Alvalor project is a live example of a venture in its very early stage that is choosing to grow in the vibrant Zug ecosystem. As we were sipping wine, Max shared his excitement around the Alvalor new blockchain platform “that extends state channels to allow arbitrary applications to be executed, eliminating limitations of block space and blockchain size. We are modeling after the Ethereum foundation as a non-profit Open Source project, with a focus on research.” Max and Alexander also confessed “Opening our offices near teams that serve as an inspiration to the blockchain community, such as Melon Port, Akasha and SingularDTV, will be a privilege. There can be no doubt that Alvalor is primed for success in a location as unique as the Crypto Valley.”
Melonport is my pick today for many reasons that I can sum up in one word as “My biases”:
- Melonport is co-founded by a woman, a young ex-Goldman Sachs trader and a Swiss blockchain developer who is an expert in the Ethereum world
- Melonport is a blockchain venture focused on digital asset management
- “Melon” is the Greek word for “Future”
A Swiss Ethereum expert with a background in mathematics from ETH Zurich and a female tech leader creating a venture that brings transparency, lower entry and running costs for hedge funds and asset managers, and access to a new asset class that promises genuine diversification; a vision that is broad and will be needed in the future world that is under construction.
I will start from the future that is beckoning infrastructure that can accommodate the new financial instruments and the new value creation.
- Melonport wants to be able to accommodate all kinds of Digital Assets.
- Melonport wants to be able to accommodate all kinds of Digital Asset management strategies (passive, active, open-end, closed-end). This encompasses the entire lifecycle from setup, to trading, custody, redemption, valuation, etc.
Melonport is a Decentralized blockchain protocol relying on the Ethereum Blockchain. In plain vanilla terms, Melonport is a protocol which means that they are building a core part that allows all sorts of Modules, that can function on top of the core part. Melonport is expecting a live beta version over the next couple of months. This will include the core part and 7 modules that Melonport has promised to offer in their green paper. These are the basic functions that a portfolio manager (PM) needs to setup his/her business. Once the PM chooses the parameters of the modules, the portfolio is ready for deployment in a secure and decentralized way (to be explained later).
Foundational Melonport modules:
- Registar: this where the PM chooses which assets will be traded. I love this, because the smart contract that operates this module, re-assures me that when I invest with a hedge fund manager who has promised to offer Alpha by a Long/Short strategy in one sort of tokens; the PM can’t “punt” on the bitcoin/TUSD rate.
- Functionality: PM can customize the rights around the use of the funds which may vary from one asset to another. This module determines whether penalties apply or not for certain actions by the PM.
- Price Feeds: PM picks the feed module (one or several) that will be used to evaluate the portfolio for mark-to-market purposes. This smart contract solves in a secure and transparent way the problem of ambiguous pricing for various assets and manipulation by the PM.
- Exchanges: PM chooses on-chain exchanges for trading.
- Trading: PM sets various rules around trading and risk management. For example, caps on leverage, caps on trade size with respect to total volume of the asset, caps on concentration exposure etc
- Management Fee: PM specifies the calculation of the management fee which typically is linked to the gross value of AUM.
- Performance Fee: PM specifies the calculation of the performance fee which typically is linked to the increases in the gross value of AUM. It also typically, involves a high-water mark, which means that if the PM is performing below a designated benchmark since inception, then the performance fee is not paid. This module will allow for more customization by the PM
Since Melonport is an open-source protocol with these 7 basic functionalities, anyone can develop more Modules on top of the Melonport protocol and create a new portal to access it. If a hedge fund manager or a passive asset manager designs his/her portfolio parameters using the 7 basic Melonport modules, that can be seen in Blockchain land as the offering of a legally binding contract. The contract terms are defined by the smart-contract terms that are operating the modules. Melonport will be partnering with data feed providers and exchanges like CryptoCompare for price feeds from various exchanges, or Oraclize for fetching data.
I won’t get into the tech details of how shares are created and how they are redeemed in the Melonport world (anyone interested can read the green paper). I will however, outline what value is created in the Melonport world. I foresee, that this will be a world that will reduce substantially the costs of setting up a fund for many reasons but mainly because the costly custodian and fund administration function will be given over to a few modules operated by smart contracts. The cost of using the Melonport protocol is MLN tokens. At the same time, there will be large efficiency gains because the processes will be real-time, without human errors, and fully transparent. These features are absolutely necessary for investing in protocol tokens and their derivatives.
The Melonport protocol is creating a digital asset management world that offers both Decentralized storage and Decentralized execution. I am excited about this future world that the assets, the track records, and the smart contracts are stored on a decentralized Blockchain. This reduces the centralized custodian risks that showed their ugly head especially during the 2008 financial crisis. In addition, decentralized execution using the Ethereum virtual machine, reduces counterparty and settlement risks.
We can all foresee a future world in which a variety of hedge funds are using the Melonport portal but also for the creation of passive investments focused in the protocol token asset class. We can foresee that Funds-of-Funds (FOFs) will be able to offer value since costs will be reduced and multi-layered risks mitigated. We can foresee better diversification across digital asset classes that would be expensive to design in the analog fund world that we currently live in.
I like to think of the growing Digital Assets space in 3 main categories:
- Digital assets that are collateralized or backed by another existing asset: These are digital assets whose value is directly linked to an analog asset. This digital asset class is representing the tokenization of the conventional world. For example, The Royal Mint Gold (RMG) which is live-tested on the CME (read more The wave of Gold trading technology is a game changer coming from the West); or the SEC approved digital preferred equity shares of Overstock on the T0 platform (read more in T-Zero sings “Love me do” to the SEC with its Blockchain Series A Preferred Shares).
- Protocol Tokens governed by a coded protocol on a blockchain: The value of such tokens can be linked to their scarcity, their adaptation and their anticipated network effects; and/or their potential as a store of value or as a currency. For example, MLN (Melonport), ETH (Ethereum), BTC (bitcoin). Protocol Tokens are digital assets that have not made their way yet into the traditional asset management world. We are seeing some very early ventures like Polychain Capital: A hedge fund investing at the Protocol layer of Web 3.0 .
- Derivatives of digital assets: For example, the 1year forward Lykke forward issued earlier this year and trading on Lykke exchange; the Bitcoin ETFs in the US (read more in Wedding announcements pending between Old & New Finance Tribes: Bitcoin in an ETF gown!)
We will be watching Melonport rollout the infrastructure for asset managers to create new strategies focused on digital assets: protocol tokens, derivatives, and tokenized old assets. Mona El Isa says:
“We are primarily building “Melon”, as an infrastructure to set up and manage funds built around protocol tokens — an asset class which we fundamentally believe will have a place in every single diversified portfolio ten years from now.” Source The Difference Between Protocol Tokens and Traditional Asset Tokens
Efi Pylarinou is a Fintech thought-leader.
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