Melon Protocol : current state
Initial testing phase proved to be challenging so far for multiple reasons. Here are some of the roadblocks observed.
High transaction costs
Transactions fees are quite high, and for the most part due to the Ethereum network congestion in 2020, but several optimizations from Melon Protocol can be done. For the more technically inclined readers, there is no incorporations of level 2 transactions or subsidies of fees (CHI) yet, which could be both part of future improvements. Overall it makes the application somewhat slow to operate in its current form.
Single benchmark option
There is only one benchmark possible at this time which is Ethereum (ETH). While there is an option to visualize and track the share price in USD or BTC, management and performance fees are calculated based on and relative to ETH.
Lagging NAV
The share price (NAV) is updated once a day only. Therefore at the time of subscription, the investor has no choice but estimate what the next update share price will be. This creates a confusing process where the desired subscription amount is variable while the number of shares is fixed. The investor has to choose a tolerance range percentage in which he would feel comfortable finalizing the subscription, should the price of the share change in between. Fortunately, this process is supposed to be revamped in the next version.
No incorporation of fund expenses and management impact
There is no concept of fund expenses in any form yet. This means that unlike traditional funds, any fund specific expense has to be paid solely by its manager. Remember that to remain fully transparent and have all accounting calculated directly by the relevant smart contracts, funds can’t have off chain expenses and hope for some magical reconciliations. Everything must pass through the fund blockchain addresses for the on-chain accounting smart contracts to remain accurate.
While operating on-chain allows funds to avoid some other setup efforts such as opening a bank and/or custodian account, there are still expenses that are going to be needed such as tax preparations.
Multi-Assets redemptions
Among many other items we won’t fully cover here, it is worth mentioning redemptions are currently resulting in a respective portion of the portfolio assets being sent out. This is surely not convenient for an investor whose goal is to diversify one single asset such as Dollars (Stable Coins), Bitcoin or Ethereum.
Restricted Asset Universe
It is especially hard to perform well within this version of Melon protocol while the asset universe is very small (14 assets). Some of the assets currently available are ‘old’ assets in crypto, old having its own meaning of time within crypto. At the same time, most of the best performing assets in 2020 are not available, especially those DeFi blue chips (Aave, Synthetix, Yearn, etc…).
It is expected that the next upgrade will bring a complete revamping of the asset selection. An active asset universe update on a regular basis is essential for a crypto fund to outperform.
Promising overall
It is also worth mentioning some positive outcomes already observed so far: multiple audits performed, no hack recorded, custody of assets made simple, and of course full transparency well exposed.
Enzyme Finance* : upcoming features**
Easier fund setup (1/2 transactions instead of 8)
Easier investor onboarding process
Better user experience (UI and Ux)
Asset universe major expansion
Multiple benchmarks possibilities
Single asset redemptions
More operational functionalities (e.g fund expenses, fund acquisitions, fund expansions, governance contributions, and so on)
Other DeFi integrations (See below — wrapping, lending, staking, derivatives)
* Previously referred as Melon Protocol V2. A brand rename was announced recently.
** Features described here are based on external reading/discussions and are not factually verified. Only time will tell if some or all of it will be fulfilled.
Other likely DeFi integrations
Wrapping
We hope that other protocols for wrapped tokens will be incorporated, such as Ren protocol or Keep network. For example, via integrating Ren, our fund could have access to some other great blockchain infrastructures (layer 1) such as Zcash, Filecoin, Polkadot, and so on. We feel this is an important part of our vision as we believe in a multichain-multipurpose world. Therefore, investing in not only Ethereum but other blockchains that resolve a different problem or add value to a different market is essential.
Lending
Why not earning interest on long term assets within the fund? That’s what the “money lego” capability of Ethereum enables, and Enzyme Finance will hopefully integrate with one of the many available lending protocols such as Aave, Yearn Finance, or Coumpound.
Staking
Some tokens can be staked to secure its relative protocol and yields interest/rewards. This is one of the many ways to passively accrue value in crypto and we hope to see deeper integrations allowing such mechanisms.
Derivatives Capabilities
While currently not possible, we should be able to trade derivatives. We should be able to have leveraged positions. In that regard, Synthetix integration was announced recently. That meant funding was granted and development started. Read more here.