MELON PROTOCOL: A BLOCKCHAIN PROTOCOL FOR DIGITAL ASSET MANAGEMENT DRAFT 3 Therefore, the smart-contract terms are agreed upon by appendix B): the investor upon investing in the portfolio.  ti   ti  h h +F a1 a1 t t hi   hi  a a  2→ 2  4. Investing and Redeeming  .   .   .   .  . . There are two ways to invest in a portfolio. The first ti ti h h an an wayistobuyshares oftheportfolioonanymarketplaceon t Wherebyconvention h i is the amount of Ether the port- a which they are traded. The second way is to create shares 1 by investing Ether directly into the respective smart con- folio m holds, at time ti. Then the quantity of shares qti created for funds F, at tract of the portfolio. F Similar to investing there are three ways to redeem time ti is calculated. The formula is the following: from a portfolio. The first way is to sell shares of the t F (2) q i = F t portfolio on any marketplace on which they are traded. p i m And the second way is to annihilate shares. This can be ti Note, by definition the share price p is independent of m done by Funds F invested. • redeeming into a separate portfolio or The quantity of shares qti are then allocated to the F • redeeming directly into Ether via a program Investor. For the investment to get incorporated takes at 3 least one block time, i.e. more than 10 to 19 seconds. Dur- trade . ing this time period the share price might change. How- 4.1. Net Asset Value. Shares of a portfolio are designed ever the Investor will be able to invest via a limit order such that they fulfil the following properties: hence they have no risk of getting an unexpected price. • Shares are fungible. 4.3. Annihilation. By redeeming funds F denominated • Shares reflect ownership of the portfolio. in Ether, from a portfolio, shares are annihilated. The in- • The inherent value of the shares is given by the vestor redeems funds F by exchanging shares against the value of the underlying assets of the portfolio. underlying value they represent. • Share price is relatively independent of invest- To request a withdrawal of amount F, one has to with- ments and withdrawals made. draw: Shares will be represented by a smart-contract follow- ti F t ti
(3) q = ⇔F=piq F t m F ing the Ethereum token standard[5]. Thus they are fun- p i m gible and tradable on exchanges such as EtherEx[8] or of shares. t Maker-Market[10]. Furthermore, Portfolio Managers can This quantity of shares q i represents a percentage of F hold and manage shares of other portfolios. t t ownership, called o i. The formula for o i is the following: Shares also reflect ownership of the portfolio, where the F F formula of ownership is the following: qti (4) oti = F F Total shares in existence (1) Ownership = Shares holding TheInvestor now redeems this percentage of all the as- Total shares in existence sets a portfolio holds, directly from the smart contract of For example if one holds ten out of a hundred total the portfolio. In doing so he/she sets up a new portfolio. shares then the ownership is 0.1 or 10%. This is dynamic, The new portfolio of the Portfolio Manager is thus: as people invest and redeem the total amount of shares     t t in existence changes and therefore also the percentage of h i h i a a t1 t1 ownership. hi  hi  a a  2 t  2  . →(1−oi) .  Theinherent share price (see appendix G) is defined by  .  F  .  the net asset value per share (see appendix F) and thus . . ti ti h h by the value of the underlying assets. an an Every time an Investor invests Ether in a portfolio, Where the separated part, is the part which belongs to shares are created and every time an Investor redeems the Investor, redeeming funds:  ti  Ether, shares are exchanged against the value of the un- h a1  ti  derlying assets and thereby annihilated. This mechanism h t  a2 of creating and annihilating shares keeps the share price o i  .  F  .  relatively independent of investments respective to with- . t h i a drawals made. n In conclusion, the inherent share price is set, not by de- This separated part can now be seen as the portfolio mand, but by performance. Each investor has the ability of the investor. The investor becomes its own Portfolio to exchange its shares at any time against the value of the Manager. They can now either decide to manage this new underlying assets. portfolio to their liking or liquidate the assets to Ether through a program trade. A program trade is an algo- 4.2. Creation. By investing funds F denominated in rithm that liquidates a portfolio to complete the redeem- Ether, into a portfolio, shares are created. The Investor ing process. sends these funds directly to the smart contract of the Since portfolios separate when redeeming funds, one ti portfolio where they are added to the portfolio h (see cannot directly expect or anticipate any future trades m 3 Aprogram trade is a trade where orders are entered directly into the market and executed automatically.