MELON PROTOCOL: A BLOCKCHAIN PROTOCOL FOR DIGITAL ASSET MANAGEMENT DRAFT 4 made by the redeeming investor. All one can see on the 6. Competitive Blockchain is the separating of the portfolio. This pro- The competitive gains of the Melon protocol are in the cess can be done in a simple and convenient way, where form of lower cost and time barriers to setting up and the investor chooses his/her selling off strategy on an off- running a portfolio. chain server which listens to the Blockchain and trades The costs and complexity to setting up a portfolio us- accordingly. ing the Melon protocol are lower than they are with tradi- 4.4. Open and closed-ended portfolios. Generally tional asset management, seconds and cents versus months one differentiates between two types of portfolios. open- andmillions. Suchbenefitswillfavourallinvestors, butes- ended portfolios and closed-ended portfolios. The differ- pecially large scale money managers for whom the major- ence between the two is that in the former there’s no limit ity of operating costs will be eliminated (well over 50% of a on how much investors can invest while in the latter there typical asset management firm’s costs today are made up is. In a closed-ended portfolio, once the investment limit of of fund administration and operations infrastructure[9]). the portfolio has been reached the process of creation will These cost savings can be passed on to savers. The lower be suspended. At this point, shares can only be bought operating costs will also enable new up-and-coming Port- on exchanges. folio Managers to enter the market by reducing minimum In conclusion, the Investor is always in control of their scale requirements and start up costs. investment and can exchange back shares to get the un- The cost of running a portfolio on the Blockchain is derlying value of the assets without having to ask for per- equal to the core usage fees, modular commissions and the mission from the Portfolio Manager or anybody else. infrastructure costs to be paid on the Ethereum platform (see Figure 2). 5. Open Theusage fees are set by the protocol and the modular As seen in section 4, portfolio share prices are de- fees are set by the module developers. Both of them are fined by the net asset value per share. This is true for expected to be a fraction of a cent or a fraction of the each portfolio deployed, meaning that share price of all trade volume for each usage. Melon protocol portfolios are visible and comparable on The infrastructure costs are equal to the gas used for the Blockchain. The Portfolio Manger’s managing and the execution of the underlying smart contracts. The gas trading track-record is visible and auditable in the same costs are dependent on the gas price set for the transac- way. tions and the amount of gas used in executing these smart In addition, all of the Melon protocols’ smart contracts contracts[15]. 4 In conclusion, by having low set up requirements and are open-source . In conclusion, the Melon protocol is an open-source low costs of running a portfolio one can create a never- blockchain protocol. Portfolio track-records and perfor- seen-before competitive environment for asset manage- mances are visible and auditable by everyone. ment strategies. Figure 2. Variable Costs of a Melon protocol portfolio 7. Decentralised Storing portfolio assets in a decentralised way, reduces AMelonprotocol portfolio can be set up, managed and custody risks. invested in, using a decentralised technological infrastruc- Incidents like the financial crisis of 2008 and the 2013 ture relying on the Ethereum Blockchain. bank deposit levy in Cyprus have taken a heavy toll on In this context, one can differentiate between decen- the trust of centralised custodians. Legislation of bail-ins tralised storage and decentralised execution. in many developed countries doesn’t help either[2][3]. 7.1. Decentralised Storage. All of the Melon proto- 7.2. Decentralised Execution. Executionofthesmart- col’s smart-contracts, portfolio track records and assets contracts is done in a decentralised manner using the are stored on a decentralised Blockchain. Ethereum virtual machine (EVM) which is distributed Storing smart-contracts and portfolio track records in a onto all nodes connected to the Ethereum network. The decentralised way mitigates the risks around single points result is generally more efficiency, security and predictabil- of failure and provides open and reliable storage of infor- ity. Most notably, counterparty and settlement risks of mation. trades are reduced significantly. 4 They are published under https://github.com/melonproject.