The Case For NEAR Episode 1: Enzyme (Previously Melon Protocol)
The NEAR Protocol Main Net Launched in Quarter 3 of 2020, roughly two years after initial development began. In tandem, on March 1st, 2019 (while NEAR was Building) Melon Protocol, now known as Enzyme Finance, launched it’s Version 1 on Ethereum.
Since that time, both protocols have been developing at breakneck speed: NEAR, for its part, is finalizing the NEAR – ETH Rainbow Bridge, has onboarded a number of new projects, and is also finalizing updates to its wallet. Enzyme meanwhile, has gone through a rebranding, has more than 435 active funds on its network, and continues to recruit fund managers onto its protocol.
In The Case for NEAR Episode 1, we put forward an argument for why Enzyme would benefit from bridging onto NEAR, so as to allow future fund managers to operate funds on either NEAR or Ethereum. This starts, in Section 1, with an overview of what Enzyme is and where it stands in its development. Section 2, explains how Enzyme currently works on Ethereum. Sections 3 and 4 explain the value added by NEAR Protocol, and puts forward a thesis specifying why Enzyme should consider migrating onto NEAR.
What is Enzyme? (Previously Melon)
“Melon is an Ethereum-based protocol for decentralized on-chain asset management. It is a protocol for people or entities to manage their wealth & the wealth of others within a customizable and safe environment. Melon empowers anyone to set up, manage and invest in customized on-chain investment vehicles.” – https://melonprotocol.com/
As described on its website, Enzyme is an open-source protocol that allows fund managers to create and manage a pooled asset vehicle on chain at “a fraction of the cost” of a traditional fund. In short, Enzyme is a decentralized solution for financial asset management: Whereas traditional funds are complex, riddled with fees, intermediaries, and legal documents, Enzyme embeds all of the rules for managing a fund between a portfolio manager and different stakeholders on a smart contract level – making it more cost-effective and straightforward, while still maintaining trust, asset custody for investors, and security.
As summarized on the Enzyme Documentation page, Enzyme provides the following to prospective investors and fund managers:
Rules and Parameters Up Front: Requires fund managers to define the key rules and parameters of the fund which are in turn deployed to the blockchain and enforced by smart contracts – no more need for fund administrators.
Transparent and Immutable Transactions: All transactions are recorded (transparently and immutably) on the blockchain – no more need for complex auditing.
Investors Maintain Custody of Assets: All assets remain in the custody of investors themselves and can be redeemed at any time – no more need for custodians.
Fund Performance is Transparent: All data about fund performance is on-chain thus transparent, enabling investors and managers alike to compare fund allocation and performance. Transactions on the blockchain are near instantaneous, and unlike transactions in the traditional world which can take several days, do not require clearing and settlement services.
Reduced Fraud and Malicious Behavior: By enabling investors to retain custody of their assets and enforcing fund parameters on the blockchain via smart contracts, Enzyme dramatically reduces the ability of fund managers to act fraudulently or malevolently.
Save Time and Money: By automating so many back office and intermediary functions, Enzyme drastically cuts the operating cost of managing a fund – thereby enabling managers to pass on these savings to investors.
How Does Enzyme Currently Work?
Enzyme is a place to create, manage, and invest in investment funds. In this sense, it epitomizes the transition from traditional, centralized finance, to innovative, decentralized finance. Concretely, Enzyme works in the following manner:
As an investor, you head over to Melon Terminal and can browse from existing funds to invest into. DAI, wBTC, wETH, and USDC are all available to invest into a fund. Once you have decided you would like to invest in a specific fund, you simply have to: (1) Approve the smart contract to transfer tokens into the fund (and Pay the Gas Fee). (2) Read the investment request. (3) From which the request is executed by anyone with access to the contracts.
As a fund manager, with meta-mask connected, you can log into Melon Terminal, name your fund, set your fees, agree to the rules of your jurisdiction and then create a fund. Once your fund is created it becomes listed on the Melon Terminal, and if it is made public, it is open to investment from any prospective investors.
Enzyme explains its goal as providing a “Platform for decentralized asset management.” As one of the first projects to build such a solution as a Layer 2 Protocol, Melon has the opportunity to revolutionize and democratize how assets (and future crypto / digital assets) are managed in an open, permissionless and secure manner.
Taken from: https://melonprotocol.com/docs/solution/
To date, Enzyme boasts a total of 432 funds with more than 4.6 million USD in assets under management. An overview of existing funds can be found at: https://melon.avantgarde.finance/.
What Does NEAR Offer Enzyme?
While Enzyme has built an exceptional protocol on top of Ethereum, it stands to gain much more from bridging onto NEAR. The two main reasons have to do with (1) Low transaction fees on NEAR, as well as (2) the long term usability value proposition. Both are outlined in detail below:
(1) Low Transaction Fees on NEAR
Enzyme is designed for either investment managers or investors to interact with the protocol. However, in its current form this becomes difficult, time consuming and costly due to high fees on the Ethereum Network. As it currently stands, it takes 9 Transactions to deploy a customized Enzyme smart contract when setting up a fund. Gas Fees can fluctuate depending on usage on ETH as well as the amount of time.
1. Begin Setup
2. Accounting Contract
3. Fee Manager Contract
4. Participation Contract
5. Policy Manager Contract
6. Shares Contract
7. Trading Contract
8. Vault Contract
9. Setup Complete
Each of these transactions are costly and time consuming for initial setup. This is also the case when it comes to investing in a fund, as every investor must approve the smart contract to transfer tokens into the fund (and thus pay a gas fee when moving funds into or out of a fund).
On NEAR, transactions are extremely cheap and designed to remain low, regardless of how active the network becomes over time (hence the idea behind dynamically resharding the network as more transactions accrue). While Enzyme currently estimates that it costs a couple hundreds of dollars for setting up a fund on Ethereum, it is estimated on NEAR that all required transactions would cost less than $10 US dollars to get started, with almost no wait time either.
The numbers here have been outlined by Illia in previous posts:
Cost: The Initial price for 1Tgas is 0.0001 N. So one block is 0.1N at the minimum.
Time: With ~1 second blocks and constant validator rotation transaction get routed pretty quickly to the validator that will include them.
Including other common actions such as creating an account and sending funds:
Note: Contracts also return 30% of the transaction fee back to the application / developer. In this sense Enzyme would actually stand to earn additional revenue as their platform grows over time, simply from taking a very small percentage of the NEAR used in starting and managing funds.
“For example, the maximum fee change per block in Ethereum is 12.5%, and the block time is 12-13 seconds. In NEAR, the maximum change is 1% at 1 second block time.” – Deribit Insights
(2) Usability for Long Term Protocol Engagement
The second point that should be considered relates to the long-term usability proposition that NEAR offers Enzyme: Enzyme exists as a place for investors to invest in crypto mutual funds (and hopefully other assets in the future) while managers can handle those funds without actually owning the capital. One question that might be worth asking, is What kind of people would want to invest in a crypto mutual fund?
If any segment (now or in the future) of Enzymes’ audience includes new crypto users, or those unfamiliar with handling the in’s and out’s of wallets, private keys, and alphanumerical addresses, then it would be beneficial for Enzyme to bridge over to NEAR: On NEAR, users are able to handle crypto using more familiar Account ID’s, simple login functionality, and one-click access to their wallet or an application on the protocol.
For the long-term usability of Enzyme, managers from traditional finance and investors new to crypto would benefit (and be more likely to use Enzyme) by having a more streamlined and user-friendly management system than what Ethereum currently offers via MetaMask. For more on this see Alex’s post here.
The Main Takeaway: If Enzyme were to bridge over to NEAR they would be able to keep their current service offering on Ethereum, but would be making a smart long-term investment in offering a more user-friendly and cost-effective service on NEAR.
Why Should Enzyme Migrate to NEAR?
Given these two major benefits, there are ultimately 4 reasons why Enzyme would do well to migrate or bridge across to NEAR: (1) Cost for Users, (2) Time For Onboarding, (3) Usability For Protocol Development, and (4) Support from NEAR.
Cost For Users: On NEAR, Enzyme will be cheap to use for both managers and investors. Starting a fund will not be cost-prohibitive, nor will investing in a fund of your choice.
Time For Onboarding: Setting up a fund will take minutes instead of hours. Sending money between funds is equally fast and will remain so thanks to NEAR’s sharding design.
Usability for Development: Enzyme hopes to re-imagine asset management under the guise of building an open, permissionless, and accessible protocol for future investors and fund managers. When taken in context, this means that Enzyme should be accessible to current fund managers interested in moving into crypto, as well as current investors looking to put crypto in the hands of more experienced traders. Both demands are handled by NEAR with their user-first design, easy account setup, and progressive security models.
Support From NEAR: The NEAR Foundation is currently in the process of finalizing it’s grants program. In parallel, the Melon Council (i.e. Enzyme Council) has stated that they are happy to fund research into initiatives that include “Research on Integration with Interoperability Protocols” as well as “Research on Integration with DeFi Protocols”. Together, the two projects are strong enough to start funding initial research into helping Enzyme bridge across onto NEAR.
Let’s Make It Happen
The Future of Crypto is collaborative, positive sum, and cross-protocol in nature. Bridging Enzyme to NEAR will not only improve traction and engagement for both protocols, but it will also make decentralized asset management more accessible to the world of mainstream finance at a time when Crypto is only starting to become known. As a long-term play for the next 5 years, bridging onto NEAR offers Enzyme an additional opportunity to engage with users and managers in a cost-effective, time-conscious, and user-friendly manner. Let’s make it happen.