Part 1

The Melon Protocol positions itself to be the frontier to Asset Management 3.0, in the same manner of the Web3 movement, one could say. But to take a step back what was Asset Management 1.0 and Asset Management 2.0? If you look through Melon’s online media outlets, you will come across these two terminologies every so often without a clear-cut definition to them, but if we had to delineate between the two:

-Asset Management 1.0 could be characterized as the era BEFORE prime brokerage services were available.

-Asset Management 2.0 could be characterized as the era AFTER prime brokerage services became available.

(I would love to hear any other interpretations between the two)

During Asset Mgmt 1.0, the stone age era as some wall street veterans might put it, trades were literally jotted and passed through pieces of paper. All of the administrative processes and costs were borne by the fund itself. Fund managers had to keep records of their own trades, manually calculate their period performances, and a host of other tedious tasks (without the help of Microsoft Excel, painful, I know).

I would imagine Asset Mgmt 1.0 to look something like this.

The post prime brokerage era, colloquially Asset Management 2.0, which is noted to have started in the 70s, allowed funds to focus on their core business, investing (Although it is debatable as to who is credited with starting these services, Wikipedia is quoted by attributing this to a US broker dealer called Furman Selz) All of the other administrative processes were lifted off of their shoulders by these emerging prime brokerage services by providing custodian services, securities clearing, portfolio reporting, etc. Basically, they helped freed these fund managers from the more time consuming and tedious aspects of running a fund so that they can focus on what they were meant to do. This time period was also supported by the emergence of electronic trading and the internet messaging, making things a lot easier and faster, but still all very centralized and prone to human error. And in fact, the prime brokerage business is very loosely regulated allowing these middlemen a lot of flexibility in terms of services and prices. About 80% of the primer brokerage industry is dominated by, you guessed it, the largest banks in the world.

As of 2006, the most successful investment banks each report over US$2 billion in annual revenue directly attributed to their prime brokerage operations (source: 2006 annual reports of Morgan Stanley and Goldman Sachs). The financial crisis of 2008 was when we really started to see a restructuring of the prime brokerage business as fund managers realized that no prime broker is too big to fail.

In a 2014 PWC report, titled Asset Management 2020, its already inevitable that “…alongside rising assets, there will be rising costs. First, the costs of complying with regulation will remain high. Commercial cost pressures will rise as firms grow their distribution networks. Fees will be under continued pressure amid the ongoing push for greater transparency and comparability.”

Well one could say that the intermediaries are there to protect investors’ interests…

“however, all it has really done is added huge layers of cost base to the industry without really providing much more additional transparency… the current system is inefficient, complicated, expensive, labour intensive and not secure.” — Melonport

As we embark on this new dawn of the blockchain era, Asset Management 3.0 will most likely develop into an era where prime brokerage services won’t be needed. This book is probably an omen to that.

Or at least they will evolve in a manner where intermediary solutions are no longer needed, but other services might be presented. Investors will be able to see real time, instant information regarding their funds they’ve invested into probably without ever having to speak to the fund manager at all.

The 2014 PWC report even goes on stating “The creation of new regional blocks and new fund platforms to service those blocks will place the emphasis on cost and efficiencies as never before. Economies of scale will become paramount.”

Those new fund platforms is exactly where the Melon Protocol fits in.

There’s probably a lot of questions as to why Melon? And what can Melon do for the asset management industry? But wait….if asset managers in the traditional world were created to bridge investors and investable assets…and if crypto/blockchain were created to eliminate the “middleman”, so to say…why do we even still need asset managers??

To put it simply, because not everyone knows how to invest. Despite the fact that information has become so much more transparent and accessible to retail investors, there is still a market demand for investment professionals to carry that duty for their clients, as easy as it may sound to the more financially savvy people out there.

And then the next question goes, when will the traditional asset managers, using traditional asset management procedures, come to fruition of the simplicity of the Melon Protocol? Where all you need is less than $50 and about 20 minutes to set up a fully functional, transparent, secure digital asset fund.

The answer is fear.

1. The fear of making setting up a fund being too easy.

2. The fear of security of assets.

3. The fear of being too transparent.

Let’s start with the first point. Setting up a fund on the Melon Protocol makes the whole notion of fund creation look too easy…easy enough for the average Joe to set up a crypto fund. It is estimated that you need at least $200 million in AUM in order to survive the first year as a fund manager in the traditional venue versus $50 in the Melon world. Although the premise does sound nice to the retail investor and everyday crypto enthusiast, the big boys sitting on millions of dollars backed by big name boutique firms don’t want it to seem too easy. Or else they are going to be challenged and exposed. But eventually, when technology and adoption accelerate, those big boys are going to have to eventually accept reality. In the same way how governments all over the world are accepting digital currencies as a legitimate tool, 10 years after Bitcoin was created. We are literally only in year 1 of the Melon Protocol being live.

The second point, security. Although the blockchain community preaches the word security in its everyday language, there are instances of loopholes in the coding language building these blockchain infrastructures. Just take the Parity bug mishap for example, in which a user “accidently” wiped out a wallet library resulting in over $200m of ether being locked up. You could search dozens of other instances of coding hiccups, centralized exchanges being hacked, etc…but to give Melon credit, they have done an enormous amount of work to perform due diligence and audits on their code. Their auditors sit on the Melon council.

To continue on the security topic, this year has flourished the crypto custodian business into fruition. Although having a custodian to custody assets of a crypto asset management firm is not in law, a lot of the large asset management firms continue to utilize these services in anticipation of future regulations that might mimic the traditional regulations such as the SEC regulation, as part of the Dodd Frank Act, requiring institutional investors holding customer assets worth more $150,000 to store the holdings with a “qualified custodian.” And that’s how you get World War 2 like military bunkers being used to store crypto keys in the Swiss mountains. And it’s perfectly normal for large investors to want that secured assurance of their assets, regardless if the Melon protocol can provide the same security. It’s a psychological thing. If they can afford it, why not right?

The third point is the fear of being too transparent. Let’s face it, transparency is what we want to see in our investments. Transparency is what we value in keeping our fund managers accountable. But do fund managers really want to expose everything about their investment strategies, rationale, and performance? Although their public answer maybe yes, but internally, they still want to hide as much as possible. They don’t want to give away the secret recipe so to say.

Throughout history we have cases of money managers hiding up their practices; Stratton Oakmont, Bernie Madoff, Lehman Brothers, Enron, and the continuous host of “centralized” crypto hedge fund managers we still see play out to this date. Or you have a host of crypto funds refusing to go through the proper due diligence in adhering to their jurisdiction’s regulations. Below are examples of the SEC clamping down on some crypto funds for misrepresentation or failing to register. Maybe they carelessly forgot to go through the procedures or purposely refused to in hopes of making them less transparent?

They want to seem like they hold the magic key when in fact, it’s as easy as 1–2–3. Well not that easy but you get my point, I hope. All these reasons listed out is exactly what we want to overturn and make them realize that there fear is true. Is Melon the answer? Time will tell. Melon is just a small part of the DeFi movement. If DeFi can continue to progress, Melon could have a strong correlation to that growth.