Wednesday, March 1, 2017

Melon Protocol – A Protocol for Managing Digital Assets Using Ethereum’s Blockchain

The past few years have witnessed the emergence of a wide variety of digital assets including cryptocurrencies, contracts for difference (CFDs), collateralized digital assets and others. Consequently, the need for methods to manage this rapidly growing class of assets is increasingly becoming urgent. Although this could be possible via investing in hedge funds, specializing in digital assets, lack of standardization renders comparison of the performance of various funds a relatively hard task. Moreover, creating and managing a hedge fund is a process that consumes much time and money, which limits the applicability of using hedge funds in the management of digital assets. On the other hand, hedge funds are inefficient in the management of digital assets because of their outdated technological frameworks.

The Melon protocol is a new tool that has been recently created for the management of digital assets via using Ethereum’s smart contracts. It can solve the aforementioned problems associated with hedge funds including competitiveness, openness and security.

Types of Assets Managed By the Melon Protocol:

To get a better idea about how the Melon protocol ticks, we have to understand what “digital asset management strategy” means. A digital asset management strategy represents a strategy formulated to manage a portfolio of digital assets. The creators of the Melon protocol classified digital assets into three broad categories:

1. Collateralized Assets:

These category of digital assets include assets whose value is gained from the collateralization of assets in the real-world. Examples of collateralized assets include Dai from the Dai Credit System, t0 from Overstock and Dassets from String Technology. DGX from Digix represents a digital asset that is backed up by a commodity; it hedges the value of a digital asset to gold.

2. Un-collateralized Assets:

These are digital assets whose value is gained from their innate security. Cryptocurrencies are un-collateralized assets. Shares issued as blockchain tokens also belong to this category.

3.Derivatives:

These are digital assets that are derived from other digital assets. Contract for difference (CFD) s are examples of derivatives.

The Melon Protocol’s Portfolio:

A portfolio, according to the Melon protocol, is comprised of a core and a group of modules. The core is represented by a number of smart contracts, on Ethereum’s blockchain, which control the basic elements of the portfolio, while the modules, represented by a number of smart contracts too, can be viewed as an auxiliary functionality to the core of the portfolio e.g. executing off-chain functions such as storing data or undergoing calculations relevant to the portfolio. The Melon protocol includes the following basic modules:

1. Registrar: this links assets to selected price feeds for trading purposes.

2. Functionality: means for building assets’ specific functionality.

3. Exchanges: marketplaces that are built on the blockchain such as Maker-Market and EtherEx where some of a portfolio’s assets can be traded.

4. Trading: a group of rules that establish the trading strategy.

5. Management fee: a payment for the Portfolio Manager (in ethereum) which is independent of the gross value of assets.

6. Performance Fee: a payment for the portfolio manager which relies on the increase in the value of assets.

Note: A portfolio manager will receive a management fee as well as a performance fee.

Investing and Redeeming On the Melon Protocol:

There are two ways to invest in Melon. The first way is to buy shares off marketplaces on which they are traded and the second way is to create shares via investment of Ether directly into the portfolio’s smart contract. On the other hand, there are three ways to redeem parts of a portfolio. The first way is to sell shares and the second way is via annihilating share; this can be done in two ways:

1. Redeeming value into a separate portfolio.

2. Redeeming value directly by Ether via a program trade.

A portfolio’s shares are setup to fulfill the following:

1. Shares should be fungible

2- Shares should reflect the portfolio’s ownership

3. Shares’ value is estimated by the portfolio’s underlying assets

4. A share’s price is more or less independent of amounts of investment and/or withdrawal made.

Shares are represented using Ethereum’s smart contracts. Accordingly, they are fungible and easy to trade on exchanges such as Maker-Market and EtherEx. Moreover, Portfolio Managers can manage and hold shares that belong to other portfolios.

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