REPORT

ANALYST

REPORT Q3 2017

© Copyright 2017 Reflexivity Ltd. - All Rights Reserved

Reflexivity Digital Asset Intelligence

The contents of this document are for informational purposes only and do not purport to be investment advice.

H T T P S : / / R E F L E X I V I T Y. N E T W O R K

MELONPORT

REFLEXIVITY

Q3 2017

QUARTERLY

ANALYST REPORT Q3 2017


https://reflexivity,network [email protected]

Cover Photo: Photo by Anders Jildén on Unsplash

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MELONPORT

REFLEXIVITY

Q3 2017

TABLE OF

CONTENTS .

01

03

ABOUT REFLEXIVITY

MELONPORT

Introduction to Reflexivity

04

Melonport Introduction

06

Our Vision

04

Why Did We Select Melonport?

07

Regulatory Insights

05

THE FLEX FRAMEWORK Flex Framework Overview

05

02

04 08

TOKEN VALUATION Token Valuation

06 18

MELONPORT ANALYSIS Team and Community

11

Risk and Governance

13

Market Position

15

Technology

17

SUMMARY Summary

PAGE 3

19

MELONPORT

REFLEXIVITY

Q3 2017

ABOUT US Reflexivity is a fully independent research, advisory, data analytics and auditing firm for cryptomarkets. We believe the best way to deliver on the promise of cryptoeconomics is to build mechanisms to facilitate ecosystem cohesion, where developers, regulators, investors, citizens, corporations and users can work together to deliver the decentralised economy. Our focus is on stabilizing markets, mitigating the risk that speculative exuberance could impact the long term viability of this nascent revolution. By providing deep insights into the most promising token-backed projects, we look to ensure a smooth transition from speculation-based to utility-based valuations. Our Flex Data Platform brings together all of the information that long-term buy and hold investors need to make strategic investment decisions. It works across four dimensions: Team and Community, Risk and Governance, Market Position and Technology. We also provide investors with strategic insights through the delivery of bespoke research. We are looking to help set the standards for independent reporting and for benchmarking tokenbacked networks on transparency, which we believe will help guide capital to the best run projects. The term we use for this approach is proactive metagovernance, as it builds on the governance approaches of individual projects to deliver ecosystem-level governance.

PAGE 4

Our Vision Through new modes of coordination and incentivization, public token-backed networks may lead to a profound social, environmental and economic transformation. However, without a mechanism to co-ordinate across the ecosystem, the promise of these blockchainenabled services will remain unfulfilled. We will deliver the advice, training, insights, tools and ideas that can make this transformation a reality.

MELONPORT

REFLEXIVITY

Q3 2017

REGULATORY INSIGHTS While we strongly believe that the community should look to self-regulate, there are now significant sums of money invested in cryptoassets and regulators will want to ensure they have the appropriate tools to oversee these markets. In some circumstances there is a strong argument that the technology can be used to ensure investors are protected. In fact, this document explains how the Melon protocol provides one such solution. Reflexivity also provide tools and advisory services to regulators to help them make sense of this fast-moving transformation. We believe that many regulators understand that cryptomarkets have the potential to deliver rapid innovation, fairer markets and economic growth, and we are working with them to help them find the appropriate levels of regulatory oversight, while continuing to protect citizens from fraudulent activity. We look forward to working with you all to deliver this open and decentralized, transparent yet privacy-protecting, safe and inclusive, global economic transformation.

COMBINING TRANSPARENCY AND OBJECTIVITY Many token-backed networks (TBN) have made a determined attempt to bring transparency to the cryptoeconomy. Many provide monthly updates, detailing the progress of the project. However, there a few things that are missing from this approach that we at Reflexivity would like to encourage:

STANDARDIZATION Investors need to be able to reliably compare each token-backed network. We hope to engage with everyone in the community to discuss how best to standardize financial reporting for the cryptoeconomy.

INDEPENDENT VERIFICATION To complement this standardized self-reporting, Reflexivity will provide independent analyst reports on each network, where we will look to independently verify all claims made in these reports and provide additional quantitative and qualitative insights on the projects.

MARKET ASSESSMENT In addition to a technology update, each network’s quarterly report should also provide an update on commercial progress. Reflexivity will add to this information with our own detailed assessment of future scenarios and challenges in growing the network.

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MELONPORT

REFLEXIVITY

Q3 2017

MELONPORT TECHNOLOGY REGULATED FUNDS

Melonport AG is a private company founded in 2016 by Mona El Isa and Reto Trinkler. El Isa started her career as an equities trader at Goldman Sachs in 2003, later moving on to Jabre Capital Partners in 2011. In 2015 she took some time off to explore the world of blockchain and met with Reto Trinkler, a blockchain developer with a background in mathematics from the Swiss Federal Institute of Technology. Melonport have identified the key areas where today’s fund management model could be improved upon by using blockchain technology. These areas include transparency, auditability, custodian challenges, regulatory visibility, risk management, cost reduction, data access and addressing conflicts of interest. The technology is built around a clear and easily understandable architecture: a core set of smart contracts, which control the interactions which make up the Melon protocol, and a set of modules, which may be provided by third parties. The smart contracts run on the Ethereum network and allow anyone to start their own low cost fund, buying and selling digital assets represented as tokens in the Ethereum ecosystem. These digital assets may represent collateralised real-world assets (e.g. Digix Gold), digital versions of company shares, app tokens (that act as a license to use a service) or private currencies for use within a specific ecosystem. It also includes derivatives of digital assets e.g. futures, swaps and options. A registrar module sets up the defining features of the fund: which assets the fund manager can trade, which price feeds they will use and which exchanges they can use to trade. Performance fees and management fees are also determined at fund initiation. A trading module defines specific trading rules e.g. a trade cannot execute at +/- some delta from the price given by the price feed. Other modules implement the logic to combine price feeds from different sources or mechanisms to extend the protocol with asset-specific functionality. Fund managers can only ever act within the parameters that have been pre-selected. Satellite provides a module registry, that acts like an “app store” for third-party modules. The team has also adopted a project called Oyente that automates security checks on smart contracts, looking for vulnerabilities. In summary, Melonport provide a decentralized fund structure where the rules are set by the protocol itself and enforced as smart contracts. They create the building blocks for a precise track record with standardized performance calculations, accounting practices and reliability using the blockchain. In terms of community, this platform allows for a straightforward community participation and reward system which gives coders the possibility to develop a module and receive compensation depending on its use.

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MELONPORT

REFLEXIVITY

Q3 2017

WHY DID WE SELECT MELONPORT? The broad applications of blockchain are well documented and there has been no end of token sales targeting every industry vertical. We know that everything from financial services to cloud services, supply chain to telecoms, entertainment to logistics, energy to government, can and will be disrupted by blockchain. So, with so many possible token-backed networks (TBNs) to pick from, why did we select Melonport? There were many factors at play in the decision. We believe that Melonport’s technology could be very well placed to play a fundamental role in the evolution of the cryptoeconomy. The killer app for Ethereum smart contracts has proved to be token issuance, specifically as a means of crowdfunding open-source networked applications. There were a number of other projects we looked at that also have the potential to become fundamental building blocks in the new economy. These include 0x for token exchange, Tierion for timestamp proofs and Aragon for decentralized organizations. All of these projects are fundamental enough to have huge network value if they can deliver on their promise. So the reason we chose Melonport was down to its unique blend of many of the factors that, we believe, will result in a highly successful token-backed network. The Reflexivity Flex Framework is our framework for evaluating TBNs. It evaluates a TBN across four areas: Team & Community, Risk & Governance, Market Position and Technology. Each of these four areas are then sub-divided into four key factors, giving us a total of sixteen factors. In the case of Melonport, three of these factors form the basis of a fascinating case study: Network Effects, Competitive Threats and Execution Risk. Melonport will create a two-sided network of fund managers and investors. This two-sided (or sometimes multi-sided) network model is also known as a platform business model and the dynamics of such networks are very well understood. The very powerful network effects inherent in these models has given us the exponential growth of firms like Ebay, Paypal, Google, Facebook, Amazon, Alibaba, Tencent, Uber and Aribnb. The Melonport network effects mean that as more investors join the network, the network becomes more attractive for fund managers. More fund managers means more choice for investors. However, networks are very hard to build and they have a range of challenges once they are up and running. Competitive Threats and Execution Risk are two sides of the same coin for Melonport. They are about to venture into a cut-throat industry and a mess of regulatory risk. The financial services industry is on high alert, ready to defend itself against fintech upstarts. It has a formidable array of weapons with which to defend its territory, as well as control over much of the elevated terrain: a well-oiled PR machine, strong regulatory influence, a very large investor base (pensions, family offices, endowment funds) and leverage over much of the existing fund management infrastructure (prime brokers, custodian, fund administration). The strategic challenge for Melonport is immense but their vision is an inspiring one.

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MELONPORT

REFLEXIVITY

Q3 2017

THE FLEX FRAMEWORK The Reflexivity Flex Framework is a comprehensive tool for analyzing token-backed networks, where the digital token is a new asset class with its own unique properties. The framework is the product of extensive research into the characteristics of token-backed projects. Just like equities or corporate bonds cannot be valued without a deep appreciation of the firm that issued them, the organization behind a token-backed network must be fully understood in terms of many factors, including its strategy, go-to-market, ecosystem, competitive threats, ability to execute and risk profile. Tokens are sometimes mistakenly assumed to have equity-like properties, yet they do not generate future cash flows that can be discounted back to present value. Tokens undoubtedly represent a currency in a specific digital economy, yet they cannot be analyzed like fiat currencies, as there is no central bank or national government to stand behind the token. In many ways a venture capital-like approach is applicable: where team, product and market are the key inputs. But in other ways, a new approach is required that accounts for what is increasingly being termed as cryptoeconomics: where community ownership, economic incentives and game theoretical approaches combine to create new and complex market dynamics.

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MELONPORT

REFLEXIVITY

Q3 2017

Growth A quantitative analysis including monthly / daily active users, daily transaction volumes, growth in utilization of each core product feature, virality, enterprise adoption etc.

Ecosystem Progression in building an ecosystem, the level of investment by interoperating entities, variety of real world use cases where this platform adds value.

Market Network Effects

Position

Platform including

business

models

same-side

/

factors

cross-side

effects, supply vs. demand liquidity, fork resistance etc.

Competitive Threats Relative strengths / weaknesses, levels of funding vs. competitors, pricing risks e.g. token over-valuation lowering

demand

infrastructure

or

over-supply

impacting

economics.

The Flex Framework is captured by four core factors: Team and Community, Risk and Governance, Market Position and Technology. Each of these factors is then broken down into sixteen sub-factors, which are in turn informed by thousands of data points collected as inputs. The processed data feeds into parameterised valuation models for the token, where the price of the token depends on the token supply, growth / adoption projections for the network, the velocity (rate of turnover of the token) and the nature of the exchanges facilitated by the network.

Execution Risk Any external forces that could jeopardize the project’s success: changes in market power structure, regulatory changes, disruptive technologies etc.

Governance Governance model, risk of conflicts / forking, voting rights, decisions to be voted on, nonprofit foundation structure and funding.

Risk & Transparency

Governance

Concerns

or

lack

of

information

about key players, sources of funding, roadmap deliverables etc.

Financial Risk Token risk including liquidity issues, new allocations / distributions, ownership distribution, inflation vs. demand growth.

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MELONPORT

REFLEXIVITY

Q3 2017 Skills Mix Level of expertise in core team and wider contributing community, diversity of skills, ability to

execute.

Motivation Financial motivation based on token distribution,

mission-driven

approach,

importance to the community.

Team & Velocity

Community

Speed of delivery vs. the competition, appropriate level of velocity given technical risks,

expected delivery

timescales of key features.

Reliability The ability and track record of the team to deliver on commitments e.g. product roadmaps / statements regarding token issuance and key players remaining committed.

The Flex Data Analytics software platform processes the data we collect from code repositories, community forums, online news, blockchain data, market data and many other sources. The processed data provides the quantitative data on which our financial analysts build their qualitative assessments. Architecture Does the architecture meet the specific needs of the network. How does it score in terms of modularity, extensibility, test coverage and tooling quality.

Usability Has the product been designed with the intented user base in mind. How does it score in terms of UI design, UX, documentation, clean APIs etc.

Technology

Availability Can users rely on the network in terms of uptime, fee volatility, transaction confirmation delays, performance etc.

Security Level of security auditing appropriate to the level of risk involved, security concerns around the implementation quality etc.

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MELONPORT

REFLEXIVITY

Q3 2017

MELONPORT ANALYSIS TEAM AND COMMUNITY Skills Mix The core Melon functionality is split across smart contracts (protocol), web library (melon.js) and the web UI (portal & decentralised portal) and across all of these projects there are five main contributors, all of them Melonport employees (Reto Trinkler, Jenna Zenk, Simon Schmid, Travis Jacobs and Ferran Borreguero). Reto is undoubtedly a very strong Ethereum smart contracts developer and Travis Jacobs looks to be a great addition to the team. However we would have liked to see more community contributions to these core modules. The Oyente subproject does have stronger community support. Oyente is used to verify Melon’s smart contracts, and is an important differentiator for Melonport. This shows that Melonport can bring together the wider community when needed. There is a great focus on UX and they have created Blocks, a UI pattern library. While it would be nice to have a single location for all technical documentation, there is a consistent and impressive stream of blog posts detailing project progress (plus the initial Green Paper and specs PDF). A new “Cyan Paper” has also been promised that will hopefully serve to provide answers to a lot of the unknowns discussed in this report. At the time of writing (October 15th 2017) there are 345 people in the Gitter communit (growing from 313 when we started this document in mid-September) and almost 9,000 followers on Twitter. Within this community there is a very strong and consistent presence from the Melonport team and the team is always helpful and very patient when answering any questions.

Chart Title

The brand identity is also strengthening and demonstrates the same patient approach to marketing and brand-building as they have applied to software development. It’s clear that a robust ecosystem of partners is also developing, which 16.000000000% we’ll cover in more detail below. 14.000000000% 12.000000000% 10.000000000% 8.000000000% 6.000000000% 4.000000000% 2.000000000% 0.000000000%

0

100

200

300

400

500

600

Token ownership distribution (Top 500 owners)

Motivation The Melonport team are highly committed to delivering the world’s leading decentralized fund management platform. They are very focused and determined, albeit with a patient and cautious approach to building this out. They understand that delivering a robust, secure platform is what will set them apart. As mentioned above, we would have liked to see more community contributions being committed to the core Melon code repositories, but for now the core Melonport team are executing well ahead of schedule.

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MELONPORT

REFLEXIVITY

Q3 2017

TEAM AND COMMUNITY (ctd.) Later in this document, we will discuss network effects and how successful token-backed projects will need to leverage the crowd to deliver success. The M-0 conference speaker list would indicate that Melonport are starting to build up a highly motivated ecosystem of partners, supporters and evangelists. Key crypto community projects are represented by Gavin Wood (Parity, Ethereum), Joey Krug (Augur, Pantera Capital), Jorge Izquierdo / Luis Cende (Aragon), Fabio Berger (0x) and Thomas Bertani (Oraclize, Eidoo), as well as a long list of many other ecosystem players (Omega One, Kyber Network, Ethfinex, Lykke, Neufund, Consensys, Thomson Reuters, Cosmos). According to Etherscan, Melon tokens are relatively well distributed across 1,493 addresses, with 1,481 of these holding less than 1% of the allocation and 1,419 holding less than 0.1%. This would seem to indicate a moderately-sized pool of well-incentivized community members.

Velocity News in early October that William Mougayar is launching a fund on the Iconomi platform (a centralized competitor to the Melon protocol) is a reminder that Melonport will face some tough competition. Later we’ll discuss the power of network effects in more detail, where we’ll see that if another fund management platform can start to build a network of fund managers (each with their own track record) and a large pool of investors, then it will be hard to displace them. The Melonport team is small and there is a case for them ramping up the team and growing the community at a faster pace. However, the counter-argument says that as a smaller team they can be more effective in delivering great software, and the fact that they are tracking ahead of schedule suggests this might be the case. While there remains a significant concern that they will arrive to market too late, the decentralised nature of their architecture may give them an advantage in certain regulatory scenarios. So while the outlook remains unclear, Melonport’s steady progression, with robust and secure deliverables, seems like a sensible one.

Recent Github commits to the Protocol repository

Reliability To date the strategy appears to be to under-promise and over-deliver. While the roadmap appears to be relatively conservative, the team is moving ahead faster than planned, with some things like Governance work ahead of plan. So overall Melonport have done a great job in building confidence in this area.

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MELONPORT

REFLEXIVITY

Q3 2017

RISK AND GOVERNANCE Execution Risk The key risk regards the regulatory environment. Regulators may appreciate the transparency, the level playing field, the potential for consumer protection and the removal of many corrupting incentives that Melon can provide. They may even see this as a way to reduce systemic risk. However, they will be keen to understand how they will monitor this approach in areas like taxation, money laundering and criminal activity. While Melonport are being proactive in this area by working with the Blockchain Policy Initiative on European regulation, it’s clear they will face some real struggles in this area with some seriously powerful vested interests to overcome. Beyond fund management, there is significant uncertainty regarding the legality of token sales and token exchange in many jurisdictions. While there are positive indications that many regulators are aware of the positive impact token funding can have on innovation and economic growth, public statements have been inconsistent across jurisdictions. Another big unknown relates to the negative impact of transparency. Many funds create proprietary investment approaches that may only succeed when stealthily executed. This is certainly the message being put forward by Digital Asset Holdings and other providers of permissioned blockchain-based trade facilitation technologies. It’s not yet clear if anonymising / obfuscating infrastructure could be introduced in such a way that it doesn’t damage trust in the overall ecosystem. Melonport’s response to these threats has lead to the creation of the Mulitchain Asset Managers Association, an industry group that will look to influence regulation in this area. The association will focus on regulation, standardization, governance procedures, education and best practice guidance. With Credit Suisse, Consensys, Bitcoin Suisse and many of the other ecosystem companies mentioned in this document as founding members, it will go a long way to reducing some of the risks outlined above.

Governance Melonport governance will be built into the network. The governance rules should allow token holders to vote on the following: • Deployments of Melon to other blockchains • To determine the appropriate inflation rate, which in turn is passed onto module developers • To pay developers for research, new features, maintenance changes etc. • Protocol changes / upgrades • Elect council members • Treasury strategy: how the funds available are invested The work on governance was originally lined up as a deliverable for 2018 but work on this has started early. The uncertainty around governance rules and their implementation will remain a concern and one we will track carefully.

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MELONPORT

REFLEXIVITY

Q3 2017

RISK AND GOVERNANCE (ctd.) Transparency So far the team have been very clear about what they are doing on the technology / product side. Monthly updates on progress, as well as various blog posts, have provided clear insights into the project and have gone a long way to build confidence in the project. While it’s unfortunate that the 227,000 Ether raised in the crowd sale (worth $3M then, but worth $68M today) was converted into Swiss francs, it does reflect the prudential approach to treasury management which has allowed them to guarantee that the future of the project is secured. Melonport have confirmed to us that they are well-financed, with a 100K MLN available to them. This is backed up by the fact that they are using the second token allocation as a prize fund, rather than using it to increase the funds available to the project. There are differing views on what level of financial transparency is appropriate here, but we would like to all token-backed projects releasing quarterly data on the overall funds available to them, as well as some idea of how much they are spending on a monthly basis (as this could have a meaningful impact on the success of each project). Some further consultation is required with the community in this regard.

Financial Risk Melonport have stated that tokens will be issued to developers of Melon modules and that a fixed amount of tokens will be issued periodically. The current inflation figure is 125K token per year, representing 10% of the initial currency base, but this is subject to governance rules and may be changed in the future. At the M-0 conference in October, Melonport made a surprise annoucement that the second token allocation of 40% of the outstanding tokens would not in fact be issued through a token sale. Instead, the tokens will be awarded as competition prizes. This is a very clever way to attract developers, investors and fund managers to the platform and should drive adoption of the token. The lack of scheduling information on the competitions and the sequencing of when various prizes will be made awarded could make it difficult to value tokens in the short term. However, the impact this could have on adoption of the platform will certainly help to reduce investment risk.

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MELONPORT

REFLEXIVITY

Q3 2017

MARKET POSITION Growth The Melon protocol is expected to launch in 1H18. While it’s clear that the global fund management industry is extremely large, with $68.1 trillion of assets under management in 2016, it is also clear that Melonport have a huge challenge ahead to build up a client base of fund managers and investors. However, Melonport do provide a solution that many people will find very compelling: a more open, transparent, flexible and user-friendly fund management platform. In our next report we will present some possible growth scenarios for Melonport.

Ecosystem It is clear that Melonport understand that their role is to build an ecosystem around this protocol and the speaker list at the M-0 conference in October 2017 provides a very strong indication that Melonport are succeeding in this area. They have managed to attract representatives from many of the exchanges (centralized, hybrid and decentralized), many of the key technology enablers for this ecosystem (oracles, price feeds, wallets), auditors, advisers, lawyers and various funds. Partners that have working integrations include Reuters, Oraclize, Cryptocompare and Oasisdex. Melonport are also working closely with uPort and Consensys to bring their KYC/AML functionality to the platform. Also Todd Ruppert, former Chairman and CEO of T-Rowe Price, has joined Melonport as an advisor, the clearest signal yet of the massive potential that this project has.

Network Effects Network effects are not just today’s strongest source of sustainable competitive advantage, they are also a key factor when it comes to designing a platform that can deliver exponential growth. In a typical two-sided network business model, a platform sits between producers and consumers. If this platform can create a situation where a virtuous cycle can be created, where as more people join the platform more value is created for everyone else, then a flywheel effect can be created, momentum builds and the platform becomes unstoppable. This creates a winner-takes-all business model where all the competition is left behind. Ebay did this with auctions, Facebook with social networks and Airbnb with rooms to let. Platform economies (as two-sided networks are also known) now dominate the business landscape, but in theory they should have taken over everywhere. So why haven’t they? The answer is that they are notoriously hard to get going. The issue is liquidity, the problem of matching supply and demand before the network has enough users. When consumers search on the platform, if they don’t find what they are looking for, they may not come back. Similarly if a producer cannot find a market for their goods, they will move to another platform. When bootstrapping a platform, the platform owner needs to create an environment where supply meets demand, at least for some subset of the marketplace. There are many strategies that can help. Ebay started with very niche markets. Paypal got their network started by building on top of a fast-growing Ebay. Facebook started as a directory, delivering value to users as a standalone app and then added social features. Dating sites have set up fake profiles. Airbnb scraped listings from Craigslist. In fact, token sales are the latest solution to this “chicken and egg” problem, they create incentives for users to encourage them to help to bootstrap the network. This is a logical extension of the tendency of platforms to leverage external resources by motivating communities into action.

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MELONPORT

REFLEXIVITY

Q3 2017

MARKET POSITION (ctd.) Melonport is an excellent example of this. If the platform can attract quality fund managers, there is a good chance that many investors will start to experiment by investing small amounts in different fund strategies, drawing in more fund manager hopefuls. As the leading fund managers build up a track record, this will attract even more investors and the virtuous cycle will continue. As the trading infrastructure improves in terms of the range of assets available, trading liquidity (not to be confused with producer/consumer liquidity), derivatives, leverage etc. a more diverse range of trading strategies will compete. Once the system has proved itself in terms of security, availability, performance etc. and as the track records of fund managers can speak for itself, larger pools of capital will move into the system from mutual funds, endowments, sovereign wealth funds and insurance companies. An intriguing addition to this mix comes with AI bots running funds. A large range of algorithms could compete against each other, building up track records trading small amounts, with the more successful algorithms attracting more investors as and when the returns outperform the market. In fact, this approach could be a very interesting feature that sets blockchain-based funds apart.

Competitive Threats The fund management space is so large that there are likely to be hundreds of hedge funds providing cryptoasset funds. However, the advantages of public, low-cost, transparent fund management put Melonport in a great place. The biggest threat in the space is Iconomi, who are up and running with passive and active funds. However, Iconomi are looking to continue the very large fees of existing fund managers, with 3% management fees and 20% performance fees. For third-party funds they take 30% of all fees. As the core Melonport service will be free (module developers may charge for use), this should give them a significant advantage. Blackmoon Crypto and Genesis Vision are also coming into the market. The Blackmoon approach focuses heavily on their regulated status but it does seem to replicate existing fund structures, albeit with some cryptoasset exposure, so in that sense it doesn’t seem to be too different from the hedge fund approach. Genesis are building a more decentralized approach but have yet to launch funds so it’s a little early to tell how they will progress. There are various substitute products in the space. Bancor have smart tokens that can act as ETFs or indexes. Coindash, Enigma Catalyst, EToro and Shapeshift’s Prism also seem to be offering “follow me” functionality.

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MELONPORT

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Q3 2017

TECHNOLOGY Architecture Melon is architected as a classic decentralized app or DApp – split across Ethereum smart contracts and the user interface code. While there remains an open question on how fast the scalability issues with Ethereum will be resolved, Melonport have aligned themselves with Gavin Wood’s Polkadot project, with a view to adding a Melon domain chain on the Polkadot network. This seems like a sensible approach, and while we do intend to track the availability of this release and it’s potential impact on the Melon project, we expect the initial Etheruem deployment to be sufficient to meet the immediate needs of the project. The small but excellent development team have great smart contract and front-end code and overall it’s a good modular, extensible and portable approach.

Usability The indications are that there is a strong focus on UX so far and this looks set to continue. They are thinking carefully about how to build clean interfaces. The APIs look very clear and developer friendly. The documentation is a little scattered right now, but they have worked hard to produce well explained and nicely illustrated blog posts covering most of the new functionality, and outlining the challenges they are solving (sometimes even while the final solution remains unclear).

Availability There doesn’t seem to be risk associated with the core Melon protocol stack. In fact, a very patient approach to testing everything, with great test coverage, bodes well for a very reliable solution. However, as we mentioned above, how well Ethereum can scale going forward is a concern. Of particular concern are the congestion issues that can arise when a token sale or some other event occurs. This could be very damaging to Melon users. Given the competition from Iconomi it would be very much in Melonport’s interests if these issues could be resolved quickly, as they could hamper Melon adoption.

Security The Melonport team’s work on Oyente sets them apart when it comes to security. By adopting one of the leading smart contracts verification tools, they have demonstrated a single-minded focus to build the most robust and secure solution in this space. So while security will remain a key concern for blockchain-based fund management, this attention to detail when it comes to protecting users makes Melonport a very credible proposition. Melonport have just announced Melon Mail, a secure mail service between fund managers and investors that was built by Decenter. Again this demonstrates that Melonport have are very focused on providing the most secure end-to-end system possible.

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MELONPORT

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Q3 2017

TOKEN VALUATION The nature of the Melon token requires us to analyse its value using the Quantity Theory of Money. The key points, as it related to Melon tokens, can be summarized as follows: • Tokenized value networks can be thought of as micro-economies • To find out the GDP of these economies you need to calculate the total amount of fees that users will pay to use the network • While Melon core protocols are free to use, fees may be charged to use modules, but these are charged in ETH not MLN • The money supply will be the total number of tokens available (1.25M in Melon’s case) plus the annual token inflation (10%) • The GDP divided by the total money supply in circulation will give us the velocity, which is the average number of times a token circulates in the economy in a period of time (say per year) • GDP will be determined by product-market fit i.e. if the product is a success in the market there will be more funds, more investors and more usage of the tokens • The likelihood of product-market fit being achieved (and with it the growth in adoption) is what drives speculative value • Initially speculators will hoard tokens when there is an expectation that increasing token demand will cause the price to rise over time • Speculators may sell off to take profits or if they lose faith in the network • Over time, token values should approach utility value • As we get closer to utility value, the velocity will have a very significant impact on the price of the token The difficulties in valuing the token today are due to the following issues: • The inflation rate is currently set to 10% or 125,000 tokens per year • The price to use the core functions of the Melon protocol will be zero for now, but could be changed later by the community • The price to use modules will be set by the developers and paid in Ether • The community will also reward developers based on (a) usage and (b) a difficulty factor associated with each module (how hard it was to build) • Fund managers will receive their fees in MLN tokens • Investors will also subscribe / redeem into and out of funds using MLN tokens • The governance model may allow the community to retain the right to withold inflation-generated tokens from circulation We will revisit this valuation issue in our next report, where we hope to have modelled the token circulation under various assumptions, to try to ascertain possible valuation ranges for the tokens after the network is launched.

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MELONPORT

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Q3 2017

SUMMARY Overall, we are very excited about the potential for the Melon protocol to transform the fund management space. One by one, they have worked through the technology challenges, and their insight into what governance is required mean that they have a great chance of building a rich ecosystem of highly incentivised partners. The biggest challenge for them, as with most of the cryptoasset space, is regulatory. However, if together with their ecosystem partners, they can design a system that addresses regulator’s concerns, there is a very real chance that they can create the world-leading platform for fund management.

Disclaimer The above represents the subjective opinions of the Reflexivity team and in no way purports to be investment advice. We highly recommend that Melon token investors perform their own due diligence.

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Reflexivity

QUARTERLY

ANALYST REPORT Q3 2017


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