There are three DeFi protocols for investing well worth learning more about: TokenSets, Betoken and Melon Protocol.
The first is TokenSets, the first application aimed at users of the Set Protocol, a public and open Ethereum protocol that allows the creation and management of freely transferable ERC20 token sets that represent groups of underlying assets. Each Set is guaranteed by underlying assets, which are locked into a deposit contract to which the protocol has no access.
TokenSets includes underlying assets, in particular Dai, ETH, WBTC, and USDC, in a determined proportion, specified by rules encoded in the smart contract of the Set, which automatically varies according to certain conditions specified in the same rules, resulting in the rebalancing of the assets when necessary. When these conditions are met, a rebalancing is proposed, but it starts only after a certain period of tolerance, in order to possibly allow the Set owners to sell them before the rebalancing. Once the grace period is over, the transfer of the Sets is suspended until the end of a Dutch auction where market participants exchange the underlying collateral of the Sets until the mix of assets of each Set is rebalanced accordingly.
There are several TokenSets to choose from, all of which follow various strategies such as trend trading, range-bound or buy and hold, and the protocol uses Maker’s oracles to acquire price data, and Kyber’s liquidity pool to create the Sets, which can be purchased in ETH. The Set Protocol currently does not charge fees and does not have a native token, although every single Set is actually an ERC20 token, so it can be easily exchanged thanks to non-custodial wallets.
There are dozens of different Sets, with different rules and conditions, each with its own price and market cap. There is also a real market of these Sets that can be bought and sold freely, except during periods of asset rebalancing.
The second protocol worth examining is Betoken, which is an open-source, public, permissionless and censorship-resistant protocol for connecting capital with talent, and talent with capital.
Besides the slogan, it is a cryptocurrency fund managed by code and meritocracy, and not by people who operate arbitrarily. Thanks to this protocol it is possible to contribute capital so that it is automatically distributed within Betoken’s community of managers, where the best performers have the greatest influence on how that capital is used.
This way the owner of the capital is not forced to make choices in pursuit of the best performance, because all managers within the platform actively trade against the market, but the protocol recognizes and quantifies their talent by assigning them units of reputation, called Kairo token, and rewarding them financially based on their performance.
The capital deposited on Betoken is converted into Share tokens, which represent the ownership of shares in the fund, fully supported by collateral locked into the smart contract. Betoken allows direct exposure to ETH, WBTC, BAT, MKR and 70 other ERC20 tokens, without real minimum income or deposit fees, using different trading platforms, such as Kyber, bZx, Maker and Compound.
The platform’s governance system oversees protocol changes and updates and provides funding for the development of new features. However, no single company or individual can control the protocol itself, which is owned by the same people who use it. In addition, the protocol is not custodial, which means that the user always retains full control over his or her funds, which are locked into smart contracts where no one can have access to those funds.
3. Melon Protocol
The third is the Melon Protocol, initially conceptualized and built by Melonport!
Melon is an open-source protocol based on Ethereum that allows the decentralized management of on-chain assets. It enables users to create, manage and invest in decentralized funds composed of ETH and ERC20 tokens in order to manage their own wealth, or the wealth of others, within a customizable and secure environment. In fact, thanks to Melon it is possible to create, manage and invest in customized on-chain investment vehicles.
Melonport was the entity that created this protocol, and it has since been shut down as planned once the protocol itself was launched. The protocol is now managed by Melon Council, a DAO created on Aragon and composed of technically skilled and user-representativevarious stakeholders.
Melon has its own native token, MLN, which is used to align the incentives of users, holders and those who maintain the protocol, by matching the value of the token with the use of the network. The token has a maxium inflation rate of 300,600 MLN per year, which is used to finance protocol development and projects based on the protocol. The DAO has to believe that allocation of these tokens will drive more value than the dilution effect, otherwise they will be burnt. It’s not necessary to hold MLN tokens to use the Melon Protocol. The fees are collected in ETH, converted into MLN and burnt automatically by the Melon Engine smart-contract.
The best way to use Melon is through the Melon Terminal, a browser-based interface running with Metamask and Frame (which allows connecting a hardware wallet). The Melon Terminal is used to configure and manage funds, and to invest in existing funds. This removes the complex network of intermediaries required for trust to be established between fund managers and investors in traditional financial funds making their setting up and management extremely costly, inefficient and lacking in transparency.
The Melon protocol, on the other hand, aims to offer a better solution for investment managers and investors, because it allows anyone to create and manage funds at a fraction of the cost of traditional funds. It also automates back-office and brokerage functions thanks to smart contracts. As a result, the Melon Terminal allows users to choose from hundreds of funds already created, or create a customized one, all based on Ethereum smart contracts.
These three protocols are just a few examples of what can be done with decentralized finance based on Ethereum smart contracts, through the creation of new ERC-20 tokens based on other ERC-20 tokens. Just like Lego bricks, ERC-20 tokens can be assembled, joined together and mixed, to build new structures that can, in turn, take the form of other ERC-20 tokens.
In addition, the various platforms running on the Ethereum network can communicate and interact with each other, in a free, decentralized, permissionless, trustless P2P and non-custodial way. This is opening new scenarios, until now absolutely inconceivable with traditional finance, where intermediaries, managers and custodians have always been absolutely necessary. Decentralized finance overcomes these limits, opening new and vast development environments where it is possible to experiment with solutions never considered before.
The three protocols analyzed in this article are just three examples of what can be done with DeFito overcome the limits of traditional finance, and since they are all already operational it is also possible to start analyzing concretely their operation to understand if they work, how they work, and what benefits they can bring to the financial world.