The revised Melon has the potential to grow as the DeFi market grows, but it still depends on the market’s demand for active asset management.
Related reading: ” Synthetix Ecological Asset Management Agreement dHedge Why is the audience favored by DeFi investment funds? 》
Written by: Jack Purdy, Messari Research Analyst
Translation: Perry Wang
As the first batch of projects to raise funds through token sales, Melon is a few years before decentralized financial DeFi appeared in the cryptocurrency world dictionary, and its goal is to restructure the core part of the financial system. Although Melon developed a viable product and led the wave of decentralized governance, its native token, MLN, lost 99% of its value after a brutal bear market.
Now that DeFi is booming, the bull market for asset management platforms has become clearer. Melon has grown by as much as 1600% in the past year. Even so, its market value is currently $60 million, which is still much smaller than many other top DeFi projects. One of the main reasons for the low valuation is that in the current state, its economic design does not allow MLN to generate considerable value accumulation. This situation was not changed until several community members put forward an improvement proposal MIP7, which planned a way to better correlate platform growth with the accumulation of MLN value.
Melon’s current economic design
Before discussing MIP7, it is helpful to understand Melon’s current operating mechanism. Melon allows potential fund managers to start an investment tool based on a specific set of parameters without having to go through the many obstacles experienced by traditional fund startup methods, such as heavy administrative costs, legal obstacles and operational burdens.
Traditional fund management (fund size 10 million US dollars), source: Melon
On the other hand, investors can evaluate funds based on transparent on-chain reports and allocate funds to any funds that meet their preferences. Managers set up funds, investors request investment, and third-party approve investment requests, all of which must burn the network token MLN to execute. These can be regarded as the cash flow of the system, which means that MLN holders will be compensated based on the amount of funds created and the amount of investment. The former accounted for most of the expenses. There are currently 375 funds, generating approximately US$23,000.
Source: Dune Analytics
At the current price of 1.75 MLN required to create each fund (approximately US$87, after MLN has experienced recent price increases, the cost of creating each fund has been reduced from 8.75 MLN to 1.75 MLN), even if it expands to the creation rate every year Tens of thousands of funds can hardly support a market value much larger than the current level. The current token economics of MLN also makes it difficult to predict the MLN burn rate, because the speed of fund creation varies greatly at different capping times.
Enter the MIP7 era
The MIP7 proposal proposed by Melon community members is to alleviate these problems. It introduces a new fee structure that eliminates the need to charge for the creation of each fund. Instead, it charges 20 basis points for the total asset management scale (AUM) of the Melon fund. cost. Therefore, if some funds are successful and a substantial investment is obtained, the agreement can monetize them more effectively.
Similarly, since AUM is easier to model than fund creation, MLN holders can better predict the MLN burn rate. MIP7 also proposed withdrawal fees and fee discounts for MLN pledges, but they were resisted by the community and were unlikely to be implemented.
Focusing on AUM fees can evaluate potential benefits through various assumptions, which involve the growth of DeFi and the proportion of Melon fund holdings. I use the market value of DeFi to speculate, not the market value of the entire cryptocurrency, because the growth of Bitcoin or other Layer 1 assets has not greatly expanded Melon’s investable field.
This is a conservative assumption, because there are already packaged versions of BTC and ETH on the market and occupy the largest holdings. However, I think Melon’s success depends on the growth of other investable assets, because most BTC investments will continue to remain off-chain, and our optimistic unique opportunities in the DeFi field will remain on-chain.
The current total market value of DeFi assets is approximately US$6 billion, while Melon’s share is only US$2.2 million. However, I expect the overall market size in the future will greatly increase, and the demand for asset management will naturally increase accordingly. Let’s take a look at how changes in these two variables will affect Melon’s potential profitability.
Melon annualized agreement profit sensitivity: As the total market value of DeFi grows, if Melon can occupy a small proportion, it may see considerable gains
Based on the actual growth of DeFi, we use the proposed 20 basis point annual fee as a coefficient, and we can obtain profit results ranging from less than US$1 million to US$25 million. By estimating returns and applying multiples of other asset management agreements, we can derive Melon’s total network value.
For the comprehensive coefficient, I used the coefficient of yearn.finance. The Vault product of the machine gun pool of this project provides a variety of revenue generation strategies. I also used the coefficient of Balancer, which can provide automatic ETF-like automatic through the automatic market maker AMM fund pool. Balance product. Using a series of earnings figures between US$1 and US$10 million, as well as the P/E ratios of YFI and BAL (20x and 56x), we can draw many different results, ranging from market capitalization below Melon’s current $65 million level, To appreciate more than 750%.
At this stage, predicting future earnings is at best wishful thinking, but providing contextual analysis helps to assess the value of the network in various situations. In order to assess the possibility of either situation, it is necessary to study the favorable factors that may drive revenue growth. As they mentioned in the latest community meeting, the team is pushing for the fourth quarter release, covering multiple improvements, including the addition of decentralized exchange DEX aggregators, OTC over-the-counter transactions, simplified fund creation, and fund migration .
But more importantly, the second version of Melon v2 will support the integration of other DeFi protocols. This means that fund managers can not only buy and sell assets, but also lend out native governance tokens and farm income. Most of the funds in the DeFi project are currently used for income farming, so this additional function will attract investors seeking to increase income. In addition, the scope of assets will be further expanded, so fund managers can invest in DeFi assets that have emerged in recent months, which will further attract investors interested in these high-growth assets.
However, even with all these new improvements, whether Melon can grow to this level of profitability will largely depend on the need for active management in this area. Although Melon allowed automated strategies, it did not gain much traction. This niche market is served through automated strategies, such as Year’s Vault and Set protocols, which are orders of magnitude larger than Melon. These strategies use on-chain data to optimize certain parameters and execute them automatically, so users do not have to actively trade all the time, and at the same time save Gas fees.
Actively managed funds, such as the funds we saw on Melon, are different in that they do not follow an existing set of rules, but allow fund managers to trade according to their own judgment. The ultimate success will depend on the ability of these managers to obtain alpha benefits. Taking the traditional fund market as a reference, fund managers are in charge of US$4.3 trillion in funds.
