Investing Filter

Table of Contents

What is Enzyme finance ?

Enzyme finance, previously called Melon protocol, is an open-source platform used to build and manage on-chain asset management funds.

Its a platform for fund managers to deploy and manage on-chain funds and for investors to invest in those funds.

What is asset management fund ?

Asset management funds invest pooled fund of capital on behalf of its clients. Asset manager invests the capital in:

  • Stocks
  • Bonds
  • Real estate, etc

depending on the mandate of asset management fund. Profits from investments are divided among the clients in proportion to their invested capital after deducting management fees.

Examples of asset management funds are:

  • Hedge funds
  • Mutual funds
  • Pension funds, etc

What role does MLN token play ?

Enzyme finance was formerly known as Melon finance. The token has new icon and name but the ticker symbol remains the same.

MLN is used to pay for executing various fund operations like:

    • Setting up new fund
    • Fees when investors invest in a fund
    • When fund managers claim rewards, etc

Origin of Enzyme finance

Enzyme Finance, formerly Melon, was built by Melonport, a private company founded in 2016 by Mona El Isa, a former vice president in Goldman Sachs, and mathematician Rito Trinkler.

Mona El Isa was born in Switzerland. She attends University College London where she got a Bachelor’s degree in Economics & Statistics.

In 2003, Mona started her career as the Vice President of “Equities Trading at Goldman Sachs” and was included in “top 30 under 30” list in Trader Magazine in 2008 and Forbes Magazine in 2011.

Melonport raised $2.9 million dollars by selling 1,250,000 MLN tokens through initial coin offering(ICO) in 2017.

The team delivered first version of their product in Feb 2019. They have been adding new features and upgrading the protocol since then.

The team dissolved Melonport and passed the governance of project to Melon council in Feb 2019.

The project rebranded to Enzyme finance in Dec 2020 to avoid confusion with Bank of New York Mellon Corporation, commonly known as BNY Mellon, which is an American investment banking services holding company headquartered in New York City.

What's the vision ?

Mona El Isa quit her job as Portfolio Manager in Jabre Capital(Hedge fund) in 2011 to start her own asset management company.

She single-handedly raised $30 million to start her fund, however soon she realized the amount was nowhere close to cover the administrative costs associated with running the fund.

She was shocked to realize that running a fund was incredibly inefficient, expensive and wasteful. She was left with no time to focus on the job she actually wanted to do – investing !

She returned the money to investors and closed the fund. She stumbled across Bitcoin and blockchain while she was casually going through Fintech news.

She was convinced that blockchain could be used to build a new infrastructure for asset management which would lead to lower barriers of entry for small to medium-sized managers.

Mona set out to achieve her vision in 2017. She launched a private company: Melonport raised capital and hired the best team of developers to bring her vision to life.

What problems does it solve ?

Managers trying to start/ run asset management funds face following problems:

  • High barriers to entry: It takes a lot of time, paperwork, effort and money to start an asset management fund.
  • Hidden charges: Most asset management funds have lengthy terms and conditions documents, deliberately written in difficult language to discourage people from reading and understanding.
  • Backend paperwork required for regulatory compliance overburdens traditional asset management funds. They have to hire an army of lawyers, accountants, auditors, custodians etc just to make sure they do not break any law. These administrative overheads drain their time and money.
  • Lack of transparency: Customers do not know what asset management company is doing with their capital. For example, if you buy a gold ETF, you do not know where and whether the fund actually holds actual gold. 
  • Non-availability: Asset management funds can only accept capital from investors within their countries. This limits their access to capital and investors have to choose from a fewer opportunity set.
  • Auditable track record: Efficiency of a fund should be determined by its proven track record instead of how well it markets itself.
  • No marketplace: There is no central marketplace where investors can search, compare and see past records of all the funds at a single place.
  • In the worst-case scenario, the fund manager can run away with your capital😭.

These problems can be solved using blockchain in the backend to resolve trust issues:

  • Enzyme finance removes all the barriers to entry. Now anyone can start a fund in a few minutes and pool in capital from investors all over the world.
  • Track record of each fund is recorded on a blockchain since its inception. Investors can see this result, compare it with other funds and invest in the most suitable fund.
  • Many new investing strategies become available at smaller fund sizes. Hedge funds and large asset management companies cannot invest in many small projects because of lack of liquidity. Smaller funds can make use of these market inefficiencies and generate alpha.
  • Fund manager does not have to be a human. It can also be a DAO or a multisig wallet that controls the pooled capital.
  • Fund managers do not have to spend money on advertisements because people can easily compare the track records of all the funds and select the best one purely based on performance.
  • Fund managers can employ strategies that were not accessible to regular funds because of regulations. These strategies include:
    • NFTs
    • Staking
    • ICOs, etc 

How does it work ?

Enzyme finance was built on Etherium smart contracts. MLN token is an ERC 20 token.

Enzyme finance sits on top of defi protocols such as: lending, borrowing, staking etc. It is used to compose funds that use these investing strategies. 

Every fund comprises:

  • Core: This is non-negotiable part of the protocol and is common to all funds.
  • Modules: They extend the functionality of core protocol. A fund manager chooses various modules based on his fund structure.

Mudules

Fund managers use modules to customize their funds according to their needs. Various modules are grouped in following module classes:

  • Price feeds: Serves real-world data of assets to fund.
  • Asset universe: Consists of all the assets the fund manager can trade-in.
  • Risk management: Set of rules that restrict fund manager’s behavior.
  • Exchanges: Connects the fund to public exchanges for trading.
  • Fees: Sets management and performance fees for the fund.
  • Compliance: Allows funds to meet requirements for various jurisdictions.

How to build and manage asset management fund ?

Tutorial for building asset management fund:

Tutorial on how to deposit capital in your fund:

Tutorial on how to place trades:

Working Demo

Enzyme finance is a fully functional product. Managers can use it to launch and manage their asset management funds. Here is a demo of their product:

Governance model

Melonport AG, a swiss company deployed Enzyme protocol on Etherium mainnet in Feb 2019. After launch Melonport passed the governance of Enzyme finance to Enzyme council

Enzyme council

Enzyme council is structured in form of a DAO. The members of DAO have been selected by Melonport with diverse and complementary fields. However, all the future members will be included in the Enzyme council by voting by council members. The council members can also vote to exclude existing members in case they are not acting in the best interest of protocol.

Enzyme council governs the protocol and makes future updates. The council DAO operations are powered by AragonOS.

The Enzyme Council has a Chair and Vice-Chair which rotate bi-annually. Their responsibilities include coordinating the meetings and agenda.

Members of Enzyme council are: 

  • Janos Berghorn: Investor @ KR1 (ETC)
  • Giel Detienne: User representative (EUR)
  • Mona El Isa: Founder & CEO @ Avantgarde Finance (ETC)
  • Felix Hartmann: Founder @ Hartmann Capital & User (EUR)
  • Fabian Gompf: VP @ Parity Technnologies (ETC)
  • Will Harborne: Founder & CEO @ Deversifi (ETC)
  • Lev Livnev: Formal verification researcher @ dapp.org and a founding partner @ Symbolic Capital Partners (ETC)
  • Martin Lundfall: Formal Verification Researcher @ Ethereum Foundation & DappHub (ETC)
  • Nick Munoz-McDonald: Smart Contract Auditor & Researcher @ G0 Group (ETC)
  • Paul Salisbury: Founder @ Blockchain Labs (ETC)
  • Zahreddine Touag: Founder @ Woorton (ETC)

Members of council are rewarded 20% of the yearly inflation with a lock-up period of 2 years. This encourages them to grow market cap of Enzyme protocol.

The Enzyme council comprises:

Enzyme Technical Council (ETC)

The ETC provides technical expertise to Enzyme council. It is responsible for:

  • Deployment of protocol upgrades (including code upgrades, feature additions and bug fixes)
  • Management of the set of ENS sub-domains pointing to the Enzyme smart contracts.
  • Allocation of resources to developers and application developers.
  • Adjusting network parameters.

Enzyme Exposed Businesses (EEB)

This includes fund managers with a minimum threshold of assets and projects using Enzyme protocol. They can use the platform to raise their concerns as users and take part in the decision-making process.

EEB balances power by checking the decisions made by the ETC. It is expected to grow as more funds deploy on Enzyme protocol.

Future plans

The team behind Enzyme protocol continues to improve the protocol and add new integrations. They have made their roadmap public.

You can check out their roadmap here.

How much money does Enzyme protocol have for future development ?

  • Melonport raised $2.9 million through an initial coin offering (ICO) in 2017.
  • Each year 300,600 MLN are minted and issued to Enzyme council. The council uses these tokens to fund future development. Any leftover tokens are burned.

Tailwinds

  • First mover advantage: Enzyme finance is building core infrastructure for deploying Defi asset management funds. They are first in the market and do not have any significant competitors.
  • Integrations: Enzyme finance has integrated with all the major defi projects:
    • DEX’s like Uniswap, Kyber, 0x, Synthetix, Curve, Paraswap to place trades.
    • AMM Pools (Curve, Uniswap, Balancer, etc) to contribute liquidity to a pair of tokens.
    • Borrowing & Lending Protocols like Compound & AAVE to earn interest on tokens that are idle in the portfolio.
    • Leverage strategies like Yearn and Idle which auto-switch between best yields.
  • Switching costs: It would be difficult for asset managers and investors to come to a consensus and organize migration to a new platform.
  • Network effects: Asset funds will attract investors. Investors will attract more asset managers to deploy their funds on Enzyme finance. This chain reaction will cause explosive growth.

Challeges

  • Scaling issues: MLN is an ERC 20 token. Enzyme protocol is built on Ethereum. Ethereum has limited block space, which makes it difficult and expensive to scale. Etherium has high gas fees, which discourages participation. Enzyme protocol has two options:

    • Migrate to some other blockchain.

    • Wait for Etherium to solve these issues.

  • Regulatory issues: Asset management funds are among the most strictly regulated business all over the world. Enzyme finance has not faced any regulation till now because of its decentralized nature.
  • Enzyme council: Enzyme DAO consists of a handful of people. The project’s governance is not completely decentralized.

Tokenomics

Melonport minted 1.25 million MLN tokens in 2017. They were distributed as follows:

Each year 300,600 MLN are minted and issued to Enzyme council. The council uses these tokens to fund future development. Any leftover tokens are burned.

Fund managers pay fees for running their funds in MLN tokens, which are burned.

Token Inflation

Each year, the Melon protocol inflates by 300,600 MLN tokens. The Melon Council decides on how to allocate these tokens. They burn unspent excess tokens at the end-of-year.

However, the inflation rate(new MLN tokens/ existing supply of tokens) will reduce because a fixed amount of MLN tokens will be added to the total existing supply every year.

Fund managers pay fees for running their funds in MLN tokens, which are burned. The number of funds will increase as Enzyme finance becomes more popular. This will further reduce inflation.

However, the current inflation rate is about 20-30% which is quite high.

Video of Mona El Isa explaining tokenomics of Enzyme finance:

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on MLN token will come from:

  • Fund manager: Fund managers acquire MLN tokens and use it to pay fees for running their funds.
  • Speculators: They will buy MLN tokens in hope of future price appreciation.

Supply pressure

Supply pressure on a token decreases its price.

Supply pressure on MLN token will come from:

  • Melon council: They will spend 300,600 MLN tokens every year to reward council members and fund development.

Market cap

Asset management is a multi-trillion industry that is growing exponentially every year. MLN token has tremendous room to grow even if it can capture a small portion of the market.

Indicators to watch out for

  • Enzyme Finance YouTube channel is growing:
  • Their Twitter following is growing:
  • Total assets under management are growing exponentially:

Social and technical indicators show that Enzyme finance is growing in popularity and value.

Future possibilities

Enzyme finance has the potential to change how we invest our money. Some ideal future scenarios for Enzyme finance are:

  • All social media influencers start their funds using Enzyme protocol.
  •  Investors will choose to buy ETF on Enzyme finance rather than traditional centralized companies because of transparency.
  • Many crypto projects are trying to tokenize real-world assets like real estate and commodities. Enzyme finance will integrate these projects to provide even more options to investors.
  • Budding fund managers can use Enzyme finance to invest their capital as Enzyme fund. Even though their capital pool will be small, but their verifiable track record will be a huge asset.

What am I betting on here ?

Value of MLN token will increase if:

  • Defi will become more popular and people will invest in defi.
  • Investors and fund managers will use Enzyme finance to run asset management funds.
  • A large number of fund managers will pay MLN tokens as fees which will be burned and removed from the circulating supply.
  • Enzyme council will not get corrupted and fund projects which create value for Enzyme finance.
  • Demand will overcome inflation pressure(20-30% inflation every year).

Final remarks

There are many traditional funds investing in DeFi projects. However,a DeFi fund isn’t just about betting on DeFi tokens to go up or down. The whole point is to use the DeFi tech stack from top to bottom, to take advantage of all its features like decentralization, trustlessness and censorship resistance.

Enzyme finance is automating the asset management industry. If code can perform the job intended by removing intermediaries and processes, then it should be allowed to do so. Enzyme finance is a great boon for investors and fund managers, however it will cut off intermediaries like custodians and regulatory bodies which hamper the functioning of open market. 

Do further research

You can continue your research by using following resources:

Further reading