A watermelon Fund is an Ethereum smart contract deployed to the Ethereum blockchain. It is the core smart contract of the watermelon Protocol. The watermelon Fund has one and only one owner. A specific watermelon Fund can be canonically referenced by its contract address. The watermelon Fund provides the essential functionality for minimalistic investment management: fund accounting, fee calculation, share issuance, custody, security, asset segregation and the division of responsibilities.
owner in the Solidity context refers to the address retaining special privileges regarding the operation of the smart contract.
Investment Manager refers to the individual entitled to exercise discretionary portfolio management authority over the assets within the watermelon Fund. As defined by the watermelon Protocol, the Investment Manager is necessarily also the creator and
owner of the watermelon Fund.
Investor refers to an individual(s) who have successfully transferred eligible crypto assets, i.e. subscribed, to the watermelon Fund through the requestInvestment() mechanism and holding watermelon Fund share tokens in their address. Investors’ addresses will have a quantity of watermelon Fund shares commensurate with their subscription(s).
Redemption refers to an action taken by an Investor invoking the
requestRedemption() function of the watermelon Fund. A successful redemption results in the Investor receiving the watermelon Fund NAV proportional to their share quantity at the time of redemption and Investor share tokens will be destroyed. Redemption requests function analogously to a limit sell order, in that the Investor specifies a redemption price, but must wait for two price feed update cycles before the redemption is actually executed. The redemption execution will fail if the portfolio holds insufficient amounts of the redemption asset token or if the price of the redemption asset token has moved below the Investor’s redemption request price, i.e. to the detriment of the Investor. Investors can also elect to redeem their pro-rata share of the individual underlying assets in the watermelon Fund directly as a “slice” of the fund, i.e. a redemption-in-kind.
Subscriptions refers to an action taken by an Investor invoking the
requestInvestment() function of the watermelon Fund. Subscription requests function analogously to a limit buy order, in that the Investor specifies subscription price, but must wait for two price feed update cycles before the investment is actually executed and accepted by the watermelon Fund. The subscription execution will fail if the price of the subscription asset token has moved above the Investor’s subscription request price, i.e. to the detriment of the Investor. A successful subscription results in the transfer of Investor subscription asset tokens to the watermelon Fund’s custody and the Investor receiving the commensurate quantity of newly created watermelon Fund share tokens based on the subscribing asset’s price and watermelon Fund NAV at the time of subscription.
The Emergency Redeem functionality truly embodies the idea that Investors have full, absolute control and custody of their asset tokens at all times.
Trade is an action that can be undertaken by the Investment Manager where a specific quantity of a given asset held by the watermelon Fund is exchanged for another asset via an exchange as specified by the Investment Manager at fund set up.
A Version Shutdown is an action which allows anyone to shutdown any individual watermelon Fund. All trading, investment/subscription and redemption in the specified redemption asset is disabled. Redemptions are fulfilled only by slice, with Investors receiving their pro-rata share of all underlying token assets in the watermelon Fund. A redemption by slice on a shutdown watermelon Fund remains the responsibility of the Investor. A Version Shutdown is a high-severity action which is only callable by the Melonport governance multi-signature wallet/Technical Council.
A Fund Shutdown is an action which can be called by the Investment Manager to disable trading, investment/subscription and redemption in the specified redemption asset. Redemptions are fulfilled only by slice, with Investors receiving their pro-rata share of all underlying token assets in the watermelon Fund. A redemption by slice on a shutdown watermelon Fund remains the responsibility of the Investor.
Address refers to any valid Ethereum address as defined by the Ethereum Protocol. Addresses consist of 40 hexadecimal characters prefaced with “0x”. External addresses are controlled by a user’s private key. Smart contract addresses have no knowable private key and are controlled by the functionality defined by the smart contract which generated the address. External addresses are usually generated by a user’s wallet.
Please refer to the LINK: Exchange section of the documentation.
Decentralized Exchange (DEX)
Please refer to the LINK: Exchange section of the documentation.
Price Feed Operator
Please refer to the LINK: Price Feed section of the documentation.
Technical Council refers to the watermelon Protocol governance body which actions governance functions related to critical operational areas of watermelon Protocol, such as Price Feed operations, watermelon Universe/Asset Registrar maintenance and future protocol development direction. The Technical Council consists of individuals elected by MLN token holders. Please refer to the LINK: Governance section of the documentation.
A Slice represents a pro-rata share of all individual tokens held in the watermelon Fund at the time of redemption request. The Investor will not receive the NAV value of their investment in the investment token, but will receive all individual tokens held by the watermelon Fund at the time of redemption transferred to their Investor address.
An abstraction to facilitate the equitable distribution of ownership of assets in a co-mingled, collective investment fund. Ownership of fund assets is represented by shares in the watermelon Fund. The watermelon Fund’s share price will fluctuate with the market price of the underlying asset tokens held. An Investor buying into the watermelon Fund at a specific point in time buys shares at that share price, ensuring that an equitable amount of shares in the watermelon Fund are granted. See also: Open-Ended Fund structure.
watermelon Price Feed
Please refer to the LINK: Price Feed section of the documentation.
watermelon Asset Registrar
Please refer to the LINK: Asset Registrar section of the documentation.
Please refer to the LINK: Governance section of the documentation.
watermelon Risk Engineering
Risk Engineering is a watermelon Fund modular smart contract which facilitates the customization of Investment Manager interaction with the watermelon Fund. Currently, the Risk Engineering module can verify if a Make Order or Take Order are permitted given the Order price and the Reference Price from the Price Feed. The Risk Engineering functionality will gain a much richer toolset in forthcoming releases, enabling the Investment Manager to demonstrably constrain Investment Manager actions, embedding an ex ante trade discipline and rigor within the watermelon Fund’s strategy. Please refer to the LINK: Risk Engineering section of the documentation.
Compliance is a watermelon Fund modular smart contract which facilitates the customization of Investor interaction with the watermelon Fund. Currently, the Compliance module can make specific Investor addresses eligible or not eligible for investment, that is an address is either allowed or disallowed to issue an investment request. Redemptions are currently always allowed. For further information on the Compliance module, please refer to the LINK: Compliance section of the documentation.
Custody is a service normally provided to funds in the traditional investment management industry. It is the practice of actually holding and safeguarding assets on behalf of a representative owner, in this case, a fund. A Custodian is a regulated, third party operator of such a service, who is entrusted with holding these assets. Contrary to a legacy fund where the fund is the legal owner of underlying assets held by a third party custodian, the watermelon Fund smart contract is the Custodian of the fund’s token assets, with the Investor having ultimate power of control of Investor assets held within the watermelon Fund. At the same time, the Investment Manager has discretionary control over the asset allocation within the watermelon Fund.
Administration is a service normally provided to funds in the traditional investment management industry and is usually a legal requirement which an independent, regulated third party must fulfill. There are many facets to fund administration:
- NAV calculation
- Securities pricing
- Preparation of financial statement, reports, filings, prospectus, etc.
- Fund accountant
- Preparation of filings
- Reconciliation with Custodian and Broker
- Daily trade settlement
- Calculation and payment of fund expenses
- Performance calculation
- Monitoring investment Compliance
- Supervision of liquidation
In the watermelon Fund context, these duties are carried out by transparent, immutable and dispassionate smart contracts running on the Ethereum blockchain infrastructure.
Auditing is a service normally provided to funds in the traditional investment management industry, and is usually a legal requirement which an independent third party must fulfill. Auditors reconcile and compare books and accounts maintained by various counterparties to a fund such as the manager, custodian and administrator, ensuring correct record-keeping between them. Auditors issue opinions with the weight of their reputation as to the correctness of a fund’s state of affairs. In the traditional investment management environment today, a high level of certainty and comfort is provided by multiple independent inspections of fund operations; essentially counterparties monitoring each other. This operational overhead naturally incurs costs which are borne by fund performance. In the watermelon Fund and blockchain context, much of this overhead is obviated in that calculations are deterministic and transparent, and the fact that the trade IS the transfer IS the settlement IS the record. That is to say, there is only on canonical source of truth: the very sending of a transaction/transfer IS the recording of the transaction, rendering comparison and verification superfluous.
The Transfer Agent in the traditional investment management industry is an institution which interacts closely with the Registrar in maintaining records and entries for the ownership of securities. Transfer Agents also ensure that interest- or dividend payments are made to the security owners on time. In the watermelon Fund and blockchain context, this duty is inherently embedded in the smart contract/blockchain infrastructure of an asset token ledger, and is carried out as a matter of course.
The Registrar in the traditional investment management industry is an institution which maintains the record of ownership of securities. In the watermelon Fund and blockchain context, this duty is inherently embedded in the smart contract/blockchain infrastructure of an asset token ledger, and is carried out as a matter of course.
An Order is a specification for a desired asset token trade. The specification of the trade enumerates the buy asset, sell asset, buy quantity and buy price. Taken together, these things derive an implicit relative price of one asset in terms of the other. Active Orders explicitly created for- and issued to a specific exchange can be seen as a live instruction to transact the trade as specified.
Make Orders are Orders for which no matching analog order exists. That is, Make Orders provide liquidity to the market for the asset token specified. Make Orders will not be executed immediately, but must wait for Investor to take the opposite side of the trade.
Take Orders are Orders which take the opposite side of a currently existing Make Order, agreeing to the specified asset tokens in the specified quantities. Take Orders remove liquidity to the market for the asset token specified.
An Order Book is a list of buy- and sell orders maintained by a specific exchange for a specific asset token pair. Once orders are filled, the exchange removes the order from the Order Book. The Order Book essentially describes the demand- and supply curves for a specific asset token in relative terms of another asset token.
Best Price Execution
When in the position of managing the capital of Investors in a fiduciary context, Best Price Execution refers to the practice, of endeavoring to find the most favorable terms for a given trade. The practice seeks to avoid rewarding illicit behavior at the cost of the Investor. In the context of the watermelon Fund, Best Price Execution prohibits exchange trades which lie below a specified tolerance threshold to the price feed, which serves as a proxy of the current market price.
Management Fee is the fee charged to the Investor by the Investment Manager for the service of discretionary management of the watermelon Fund’s assets. The Management Fee is specified as a percentage of the Investor Gross Asset Value (GAV) on a per annum basis. The Management Fee is paid in shares of the watermelon Fund. Fee shares are created out of inflating the total supply of watermelon Fund shares, achieving the same impact as directly paying fees out of the watermelon Fund’s underlying token assets, but in a more simple and elegant mechanism that further aligns Investment Manager incentives with Investors.
Performance Fee is the fee charged to the Investor by the Investment Manager for achieving positive performance in the management of the watermelon Fund’s assets. The Performance Fee is specified as a percentage of the positive performance achieved over a given time period, i.e. the crystalization period. The Performance Fee is paid in shares of the watermelon Fund. Fee shares are created out of inflating the total supply of watermelon Fund shares, achieving the same impact as directly paying fees out of the watermelon Fund’s underlying token assets, but in a more simple and elegant mechanism that further aligns Investment Manager incentives with Investors.
Highwatermark is the NAV/Share level indicating the highest performance the watermelon Fund has achieved since the last fee claim by the Investment Manager. This metric is used to determine the level of performance fees due to the Investment Manager at an given point in time.
Crystalization period is the interval of time over which a performance fee, if earned, can duly be collected. Here, earned is taken to mean that the current NAV/Share is higher than the ending NAV/Share level of the previous period for which fees were claimed.
A hurdle is a percentage figure indicating a positive performance amount below which performance fees will not be charged. Performance exceeding the hurdle rate will be charged as specified under Performance Fee. Hurdle functionality in watermelon Fund performance measurement is not yet implemented.
A breach occurs when a specific measurement exceeds a defined threshold.
Stake is a form of security deposit held by a smart contract and used to incentivize desired behavior. When observed behavior in contrast to specified behavior is detected, the smart contract has the ability to burn all, or a portion of the staked security deposit.
An Open-Ended Fund is a fund structure which places no upper limit on the amount which can be invested. As capital enters the Open-Ended Fund, new shares are created commensurate with the current NAV of the fund and the amount of capital invested. As investment capital leaves the fund through redemptions, the representative shares are destroyed, commensurate with the redemption amount.
A Token is a symbolic representation of a unitized measure in a cryptographic decentralized ledger system. Token ownership (or control) resides exclusively with a cryptographic address and can only be transferred (or interacted with) by the use of the private key belonging to the holding address. The private key is used to create a cryptographically-signed transaction which is submitted to the blockchain network, which in turn executes the instructions specified therein.
The ERC20 Standard is a standardized token interface which specifies certain functionsand events, which when implemented, allow a token to interact with other tokens and infrastructure smart contracts. See ERC20 Token Standard.
The Ethereum blockchain is a blockchain network which implements smart contract allowing the user to specify how state may change. Ethereum is the foundation for many decentralized applications including the watermelon Protocol and watermelon Funds, as well as all asset tokens traded and held in watermelon Funds.
A Blockchain is a general purpose technology which can store data in a decentralized and immutable way. The storage and maintenance of the data is incentivized by the internal issuance of a blockchain-native token of value.
A Transaction is a transfer of tokens/value from one cryptographic account to another or the calling of a function on a smart contract to affect some behavior on the part of the called smart contract. In some cases, a smart contract function call can also include the transfer of tokens/value.
The NAV is the Net Asset Value of the watermelon Fund. The price of a fund is quoted on a per-share basis, i.e. NAV/Share. The NAV will fluctuate with the market price of the underlying holdings of the fund. Market prices are represented by the Canonical Price Feed providing a periodic valuation of the fund assets. Net Asset Value is value of net long positions in the portfolio less any credit positions (e.g. leverage) less any fees due. Currently watermelon Funds can only hold long exposure positions and cannot implement leverage. This means that the NAV will be the GAV less unclaimed fees at a given point in time.
The GAV is the Gross Asset Value of the watermelon Fund. The GAV will fluctuate with the market price of the underlying holdings of the fund. Market prices are represented by the Canonical Price Feed providing a periodic valuation of the fund assets. The GAV represents the current market value of the watermelon Fund before the consideration of any fees due at a given point in time.
The Investment/Subscription Asset is the token asset defined by the Investment Manager with which Investors may invest or subscribe to the watermelon Fund.
The Redemption Asset is the token asset defined by the Investment Manager in which Investors may redeem from the watermelon Fund.
The Quote Asset is the asset in which the watermelon Fund is valued. The Quote Asset is specified by the Investment Manager at the time of the watermelon Fund’s set up.
The Native Asset is the token asset used by a blockchain for internal accounting, incentivization and transaction fee payment. The Native Asset on the Ethereum blockchain network is Ether (ETH).
Allocate vs Invest
Allocate: The Investment Manager chooses and trades for specific assets within the fund. Allocation is the only discretionary power with the Investment Manager regarding the watermelon Fund’s underlying holdings.
Invest: The Investor transfers tokens to the watermelon Fund. Technically, the watermelon Fund also invests into the underlying holdings; this underscores the fact that the underlying holdings’ ownership is completely segregated from the Investment Manager and resided with the watermelon Fund smart contract, and ultimately, with the Investor.