Special KR1 guest post: Mona El Isa, Founder of the Melon Protocol exploring the emerging DeFi movement

Off-piste DeFi observations

DeFi has been gaining momentum and increasingly more people are watching the growth in the space as tracking tools like DeFi Pulse and DeFi Prime emerge to track the various metrics. The most talked about metric of performance at the moment is ‘locked ETH’, but no doubt others will emerge over time.

Maker remains the lending protocol of choice with just under half a billion dollars of assets locked in there but an interesting trend is emerging as more and more DeFi projects come to market. Maker dominance is diminishing as a percentage of overall marketshare. It’s still early days, but keep an eye on new DeFi protocols coming to main-net and take note how some of them start to aggregate the DeFi space with other parts of the value chain facilitating the user experience.

As an example I happen to be quite familiar with the Melon protocol, a protocol for ‘smart third party asset management’. Investment managers are enabled to set up an investment vehicle (eg. a Fund) which pre-defines all the rules of that fund in smart-contract code. For example; what the investible asset universe is, which DEX’s the manager is allowed to trade with, management and performance fees, risk management rules imposed on the managers in the form of pre-trade checks, how and when the NAV is calculated, who is allowed to invest in the fund and so on and so forth. Such protocols also enable full transparency to investors in those funds by enabling them to maintain self-custody of their portfolio investments at all times with the comfort of knowing that managers have to adhere to the transparent rule-sets enforced by code.

One doesn’t have to look too hard for an example of why this can be so important. The recent drama with renowned investor Neil Woodford in the UK at the moment is a good reminder of some of the challenges industry faces. It has been unravelled that the fund which promised daily liquidity to its investors was in fact invested too heavily in unlisted and illiquid investments. Recent bad performance has led to some big redemptions which caused Woodford to have to “block redemptions” indefinitely for all other parties still invested in his fund. Investors now have to pay the price (again) for lack of transparency, possible internal conflict of interest when it comes to oversight of the fund, lack of ability to enforce fund rules and failure to provide daily liquidity. In contract, DeFi protocols like Melon give investors full transparency, custody and enforce manager’s promises by code.

Melon dashboard

Melon has integrated several parts of the ecosystem including aggregating several DEX’s (Kyber Network, 0x, ERC Dex, Radar Relay and soon Ethfinex). It runs its governance system on Aragon and with a view to adding more types of assets (eg. Lending, interest-baring products, derivatives etc) into the protocol creating more of an ecosystem for DeFi than a feeling of fragmentation and disparity. Melon has so far seen 93 crypto test funds launched on the main-net since going live just over two months ago. Whilst the fund sizes are small and mostly set up in the spirit of early innovator and pilot testing capacity, trying these kinds of protocols out and using a bit of imagination enables users to see how DeFi can quickly emerge into a very efficient and powerful ecosystem encompassing almost all parts of the traditional financial and asset management on-chain.

- Mona El Isa, founder Melon Protocol