MELON PROTOCOL: A BLOCKCHAIN PROTOCOL FOR DIGITAL ASSET MANAGEMENT DRAFT RETOTRINKLERANDMONAELISA Abstract. The Melon protocol is a blockchain protocol for digital asset management on the Ethereum platform. It enables participants to set up, manage and invest in digital asset management strategies in an open, competitive and decentralised manner. 1. Introduction Digital assets which do not gain their value from collat- Thevalue and importance of a wide range of digital as- eralisation, called un-collateralised assets. Finally, digital 1 assets which are derived from existing digital assets called sets has risen dramatically over the last few years. Hence derivatives. the question naturally arises how to manage this new and fast-growing asset class in the most advantageous way. 2.1. Collateralised Assets. Collateralised Assets, are This could be done by investing in a hedge fund which assets which gain their value from the collateralisation of specializes in digital assets. real-world assets. Examples are Dai from the Dai Credit However, the lack of standardisation can make com- System[13], Dassets[11] from String Technology or t0[12] parison of fund performances difficult and fund auditing from Overstock. An example for a digital asset backed by practices can be very opaque. a commodity is DGX from Digix[4] which binds the value Asecond deterrent, is the time and high cost required of gold to a digital asset. for setting up and running a hedge fund. This limits the 2.2. Un-collateralised Assets. Un-collateralised assets range of possible hedge fund managers to a comparatively are digital assets which gain their value in the scarcity small group of people. It arguably also limits competi- of the token itself. Examples for un-collateralised assets tion between hedge funds creating qualitatively less good are ETH(Ethereum[7]), ETC(EthereumClassic[6]), REP hedge fund performances[14]. (Augur[1]), DGD (Digix[4]) or MKR (Maker[13]). Even- Athird deterrent to investing in a hedge fund is some tually even companies issuing tokens as shares on the of the outdated technological infrastructure, giving room Blockchain will belong to this set. for a lot of inefficiencies. Section 2 through 4 of this paper will discuss the gen- 2.3. Derivatives. The third set of digital assets are eral mechanics of the Melon protocol. Section 5 through derivatives of other digital assets. In the context of this 7 will discuss how the Melon protocol can be used to solve work, a derivative is defined as a digital asset which has above objectives of openness, competitiveness and secu- its value directly derived from another digital asset. An rity. Finally, section 8 will propose a solution for protocol example for this set is a contract for difference (CFD) of development. an existing digital asset. In conclusion, the restriction to digital assets will be with the adoption of Ethereum and the various decen- 2. Assets tralised applications and services built upon it be less and less restrictive. To better understand the general mechanics of the Melonprotocol, lets start by defining the term digital asset 3. Portfolio management strategy. A digital asset management strat- Having seen the selection of digital assets waiting to be egy is, in the context of this paper, regarded as a strategy managed by up-and-coming Portfolio Managers, let’s now on how to manage a portfolio2. Each portfolio can hold a variety of digital assets, where these digital assets repre- discuss the general mechanics of how this can be achieved sent the value a portfolio can hold. technically. As a motivation to the challenge ahead, let’s look at a Each portfolio consists of a core part and a set of mod- few examples of these digital assets currently available, or ules (see figure 1) in development. 3.1. Core. The core part, written in a set of smart- For the sake of ease, and to highlight the differentiation contracts, can be seen as the part which holds everything in underlying value, we categorise digital assets into three together. The modules, also written in a set of smart- sets: Digital assets which gain their value from collateral- contracts, can be seen as the auxiliary functionality to isation of an underlying asset, called collateralised assets. the core part. The core part together with a set of rules E-mail addresses: (Reto Trinkler) [email protected], (Mona El Isa) [email protected]. 1Throughout the present work, a digital asset, is regarded as a digital token of value, run and stored on the Ethereum Blockchain. There is no technical difference assumed between what an asset and what a token is, the terms are interchangeable. However in the context of portfolio management usually the term asset is used. 2Throughout the present work, a portfolio is regarded as a finite set of digital assets. 1