About this episode
As one of the first Defi projects, Melonport set the stage for what was to come in 2019 and beyond. Founder Mona El Isa speaks in this episode about Defi's rapid growth, rebuilding Melon, and the future of Web 3.0.
Where to find the show
What to listen for
- Why Melon foresaw aspects of DeFi’s rapid growth in composability, but not the speed of its development into a new financial stack.
- Why Melon now has a three-year flexible roadmap for their protocol’s development, and how they learned lessons from their first fixed ‘roadmap’ about delivery versus the ability to innovate.
- Why Melon rebuilt their user interface to deliver a better user experience and grow their community network in 2019.
- Why asset infrastructure is a chicken & egg thing: you build it to see if they will come, without knowing what kind of assets will be integrated in the future.
- Why the future is tokenised asset classes, but it may take five, ten or twenty years to get there given the current state of US securities law which is not fit-for-purpose.
- Why Mona set up MAMA, the Multi-chain Asset Managers Association, to coordinate action between DeFi projects to lobby Regulators and US lawmakers to change the existing securities laws to be fit for Blockchain.
- How DeFi’s creation of Web 3.0 native asset classes makes it much less dependent on security tokens for success.
- Why maybe it is time for extreme measures like debt-jubilee in responding to the aftermath of Coronavirus.
- How, with bond rates going to zero, the landscape of investing and asset management will change, because bonds will become cash and that has never happened before.
- Why both Sam and Mona never foresaw the demand for Stablecoins like Tether and USDC, and why this is one of the most commercially useful innovations in DeFi today.
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I heard you speak at a conference in Zug in 2018 and I have been super excited to have you on the podcast. I was impressed with Melon. Melon protocol is live now in 2020, and the transition to the foundation has taken place. I have been following you since 2018. It is cool though to see the growth.
How would you describe the implementation and where you are now? Are you happy with the development so far in the Ethereum Ecosystem? The first time we hit the main net was in February 2019 with Version 1. At the same time, we gave up control of the main net at the same time as we launched it. We were the first protocol in history to do that. It was quite a strange feeling to do that and quite experimental as well. I think we have a very well thought out governance process combined with an attractive token model which aligns the stakeholders in our ecosystem, so it is a well thought out process. In practice, it is a little bit different than the theory, but it has been an interesting first year. To see Melon run and be governed by a DAO. The V1 implementation, we were happy with that and we over delivered on our road map. Having a fixed roadmap in this space is maybe not the most sensible thing to have in this space, to be honest. This space is so fast-moving. When we set out in 2017 and conducted our token sale, to deliver that roadmap – there were only three DeFi projects out there then.
We have had to adapt since them because of the developments in the space. We integrated exchanges, including Kyber Network, that we had not planned on integrating due to developments in the space like lending, credit, derivatives, etc. The space underneath us moved so fast and so much – that having a fixed roadmap was not a good thing. This time the roadmap is not set in stone; we learned from our mistakes, and we decided that we wanted to put forward a three-year road map. We are not one of four projects building on Melon, but we are the lead developer building on Melon. We have also re-architectured the protocol in a large way. Our first UX/UI we delivered last year was not one that we were particularly proud of; it definitely hindered user growth. One of the first things we did in October last year was to rebuild the interface from scratch and so anyone using it today will see a massive improvement in user experience. It still could be better, but it is night/day in comparison to the last version. I tried to show both sides of what we delivered.
You have been building Melon since 2016. You mentioned some of the huge shifts since then. There was no lending platforms then or DeFi platforms. There has been an explosion in DeFi platforms since them. Did you foresee this coming or the rapid growth of composability in the DeFi space? Yes, to some degree, I definitely saw the composability. I didn’t expect there to be only on DEX for the rest of our lives. I also saw the tokenised assets would explode but not in the way I envisioned it would. I think yes and no is the answer. We set out building asset management infrastructure we were building this from Day 1. However, when you are building asset management infrastructure, the products that will be integrate-able into that infrastructure will also be built. The infrastructure play is a chicken and egg thing: you build it to see if they will come to use the asset management platform, without knowing what kind of assets will be integrated in the future. I guess you can take some examples from existing financial products/systems. It is risky to be so far ahead in infrastructure when the rest of the space catches up in having to use it.
One of the assumptions we made was the future would be tokenised asset classes. We envisioned that everything you may wish to purchase or sell would have a tokenised asset classes just like everything does today. This was the main underlying assumption we made from the beginning. The future is tokenised whether it takes 5, 10, or 20 years to get there. What we have seen is that we have to make developments to the protocols, and we would have to integrate these as we go along regardless of our assumptions. There are new decentralised assets that we did not see before, such as Cryptokitties, collectables, DAI etc.
As someone working with securities on Blockchain now, it is interesting to see how everything integrates with existing regulatory structures. Working at Realt.co, we are the primary insurer of securities. If we want to go to an exchange currently on Ethereum, they all want transfer agents like Securitise, when we do a lot of that work ourselves. What I am finding is that there is a walled garden where we can build securities that exist and operate in DeFi really well, through for example using UniSwap and build into Melon if we whitelisted contracts. There are other platforms we know we could integrate into as well; but, when we want to go back to more regulated financial structures, like regulated securities exchanges on Ethereum, it gets much more difficult.
How does this get bridged? This is a good question. I don’t know. Anyone who has looked into securities law and tried to apply it to any Blockchain securities will know that existing US securities law is just not fit for purpose. It doesn’t make any sense at all, and it hinders innovation in that space, which is a real shame. It is also why we haven’t seen more development in tokenised securities because Blockchain offers a ton of advantages that the regulator wants and likes, but often these advantages are overseen. They just get caught up in the narratives of Blockchain and their fear of it.
It results in very inefficient processes, or people giving up on what they were trying to create. What my view is that this is going to have to change, and it is going to require coordinated action from DeFi projects. In 2017, I helped set up MAMA, the Multi-chain Asset Managers Association, which was built exactly for this purpose and to respond to any Blockchain-related papers to governments, regulators, and lawmakers. We are always lobbying for this kind of thing and trying to encourage regulators to be aware that this is detrimental to innovation. We have approached this by coordinating the industry, but this is a longer-term game.
In the meantime, what has been really impressive is that the DeFi space has become less dependent on security tokens as a means of success. Because there are so many Web 3.0 native asset classes now, it doesn’t even matter if it takes five or ten years for security tokens to become a reality. In the meantime, you have interest-bearing tokens, and you can stake against a project or via insurance protocols and earn interest on that. There are on-chain derivatives, etc. being built and the whole collectables market. These all are very interesting investable asset classes that are not securities, and so that is an interesting evolvement. If you had asked me three years ago if the success of DeFi would have been based on security tokens becoming a thing, I would have said yes. I was wrong about that. There are enough native Web 3.0 instruments to make DeFi a stand-alone industry on its own without security tokens. Security tokens will become a thing, and then it will be explosive. We just need the regulatory and security law to catch up to DeFi in order to integrate security tokens into the DeFi space. The problem is that these Web 3.0 Instruments are highly correlated to Bitcoin and Ethereum. It creates too much inherent risk in the portfolios themselves.
We are excited about synthetic tokens and what you guys are doing in the real estate space. Medium to long term, we are convinced protocols like Melon can be used to create trust between investors and fund managers for any kind of tokenised asset.
The point I am trying to make is that if you had asked me in 2016 if we were dependent on security tokens to drive usage, I would have said yes back then. But that is because I did not foresee these native Web 3.0 instruments coming. The longer I am in the space; I have to wrap my head around what kind of assets would I want in my portfolio for a longer period of time? It is a very difficult question. With the inherent volatility in the space, it is hard to do that once you get past the first few native assets. DeFi was when Ethereum people realised they could put interest rates on the Blockchain. Once you have an easier way to integrate with interest rates, it makes the space much more accessible.
Mona sees it differently. What you see now is a new financial stack being built. Like any stack, the stack is made of many layers. The baseline is the Blockchain we are building on: Ethereum. The layer on top of that is the issuance of native Ethereum-based assets, whatever they may be, starting with Ether ranging from RapBTC to all the ERC-20 tokens we know including on-chain derivatives and interest-bearing tokens. This is the asset issuance stack.
On top of that, I see the infrastructure stack (or maybe that is even below, I am not sure); the infrastructure stack is the protocols that are being built that establish trust between various different players. Ethereum does that for token transfer, so the first layer of the stack. Melon does that between investors and fund managers without the need for intermediaries. ZeroX establishes trust between buyers and sellers without intermediaries. Compound establishes trust between borrowers and lenders without the need for intermediaries. That is what I consider the infrastructure layer. On top of that, you have the application layers and interface layers where people build products on top of the infrastructure layer.
My colleague David writes a lot about Ether is Money, and everything is built on top of ETH and which is creating a new monetary system. Even now in 2020, my original idea of Bitcoin was as separate from fiat money structures. The USA has draconian measures for how people can use its money. This causes stress in countries where people cannot get dollars freely, like in Russia and Iran. An asset-backed stablecoin connected to the dollar or synthetic dollars is what people want to keep the value of their money stable in places where inflation is out of control in their home currency. That is hugely compelling and a big selling point that gets missed.
Mona thinks we are still very early the lifecycle of DeFi and Crypto as an asset class and so because of that, everything tends to be very highly correlated though she understands the idea that Bitcoin is a way to hedge against your local currency or against high inflation. They all appear to be very highly correlated in today’s highly volatile environment. These tokens and networks that have been launched are still in their infancy. What gives a token value is a non-security token is linked to the success of the network. We are so early on that curve. Mona thinks it will be a year or two before we see this curve inflect. We won’t really see this value until users start to depend on these protocols, and then you have something that looks like an investable market instead of a speculative market. In that case, your alternative then is not to hedge your Venezuelan currency with Bitcoin, but to invest, for example, in a Melon Fund that diversifies across a range of crypto funds or a basket of crypto assets and/or stablecoins. It could be a fund that arbitrages between DEXs without risk. There could also be a fund that stakes its funds against protocols that they have audited like Nexus Protocol. There will be some very interesting alternative investments that give you all the same things that Bitcoin gives you. It is hard to see that right now.
This goes back to the questions Same asked earlier when Mona launched in 2016 about what Melon did not see coming; what Sam didn’t foresee is the growth of the stablecoin market and especially Tether and the growth of USDC through Circle. These are even more important than the market for Bitcoin or any other cryptocurrency because they allow for commerce to happen on-chain and that is something people talk about happening on Bitcoin or with ETH, but Sam does not think it will. One of Sam’s belief is that Crypto does not become less volatile. It is an inherent characteristic of both protocols. Maybe Ethereum gets over it, but Bitcoin will always be volatile because it has a fixed supply. You can issue synthetic dollars as a means of exchange – using it for commerce and cross-border transactions. There is high demand in Russia for Tether to send money to China on a daily basis back and forth from Chinese traders who sell their products for rubbles and send them back in the form of Tether to China.
It comes down to expectations. There is this idea that there is one asset that you can use for every kind of economic activity. It doesn’t exist. Stability is key for commerce and businesses. You have worked on the institutional side. Sam sees Crypto as a retail product. How can these assets affect the institutional side, which deals in a very different way to the retail side? The traditional side will be steered by its clients. If clients demand certain products, they will go where they can access these asset products. Maybe they will move to CoinDesk etc. to service people in those fields. I am seeing institutional people who are now asking about Bitcoin who I would have never thought would be interested. There is an increasing need for uncorrelated assets given everything going on. Mona was disappointed that Bitcoin was in fact correlated to the markets with Coronavirus. It will be really interesting if Bitcoin stays correlated to traditional investments or not.
The recent market crash in Bitcoin was a direct result of market makers hedging the VIX. Margin calls for market makers caused the crash – because the spreads got too large. The sell-off happened so suddenly. Some of those people moved into USDC and DAI before those huge sell-offs. Retail people saw this coming before the institutional traders. Over time, when you see on-chain funds in these kinds of events outperforming traditional funds, then people will start demanding these type of products. In a couple of years, we will have these interesting alternative DeFi investment products and assets classes which will have proveable on-chain track records of success through these events.
How long does it take after Coronavirus to return back to some semblance of normalcy? If you are in a high-risk group, you probably don’t change your behaviour for a long time. What will business look like for small/medium businesses? What will the aggregate demand look like? The V-shaped recovery is not a given at all. We have never been through this before.
I think it will create a lot of anxiety for many people as reducing asset prices will be a good thing for millennials but not for those approaching retirement. Annualised 30% reduction in GDP is what they are predicting. The reactivity of Government was much faster than in 2008, but QE for the people is much faster, but it is not enough. The Question: Are their infrastructures in place to get the money to the people? The answer is probably No, especially in the US. I think no one knows what will happen.
It would be the perfect time to do something extreme like debt-jubilee. Why not do a haircut on debt to reduce debt exposure for everyone? The core structure of the dollar includes a huge level of offshore debt in the Eurodollar markets which cannot be helped by the federal reserve – they cannot intervene in offshore debt. This will keep the dollar strong for decades to come. The Fed’s response, while large does not fix the problems outside the domestic market. It is mind-boggling. I don’t know who they fix it. It is time to do something big. There is an overwhelming focus on health priorities right now. Beyond that, it is something that we need to think about and address. With the rates going to zero, it changes the landscape of investing and asset management when bonds become cash.