DECENTRALIZED MACROECONOMICS

by Mychal Simka

(APE HARMONY Whitepaper)

There is no war
There is no peace

There is only math

...and apes.

Apes + Math = Ape Harmony

INTRODUCTION

The primary difference between sophisticated economies where skyscrapers are constructed, and primitive economies where people push cinder blocks around in a wheelbarrow, is mathematical derivatives.

No humanitarian led effort can ever stabilize an economy. We know giving a man a fish is futile. But teaching a man to fish is also obsolete. What we need now is derivatives of fish.

Some things are suitable for DAO governance. For example how to spend the town beautification budget. There are other things on which the very idea of voting is absurd. (No matter how many people vote that 2 + 2 = 5, it will always be wrong.)

Derivatives enable us to extract the future value of assets in the present, and do so in a mathematically precise way. Their efficiency is dependent on free markets with multiple tiers ie. assets/value stores --> liens/notes --> guarantees/insurance and so on.

Derivatives are constructed with specific formulas. There is no room for opinions or preferences. They either work or do not. When they work they are extremely powerful, but with great power comes great risk.

Balanced equity-backed derivatives are the foundation of all thriving economies but they do present new risks:

1. manipulation by concealment ie. bad actors in a black box

2. manipulation by complexity ie. bad actors and ignorant clients ie. not reading the fine print.

The first can be eliminated with full transparency. The second can be decreased by clients becoming educated, and as a natural result of competition in a free and decentralized economy.

The 2008 financial crisis was caused by manipulation of the first type. Practices such as naked short selling, and black box packaged derivatives, are abuses of, not inherent flaws in, derivatives themselves.

Decentralization is revolutionary, but it is not everything. Despite the abuses of centralized power over the last several hundred years, macroeconomics and history can still teach us a lot.

If we continue to build only according to microeconomics principles, rather than strive to balance assets through derivatives on a macroeconomic level, we will never move beyond pushing our digital wheelbarrows down the blockchain.

WHAT IS APE HARMONY

Ape Harmony is a marketplace and creation tool for equity-backed derivatives like simple liens on high value NFTs like Bored Apes. In theory derivatives can have an indefinite number of tiers, but the first tier is simply a claim to value against an underlying asset ie. a lien. 

The goals of Ape Harmony are to:

• Construct native digital derivatives based on macroeconomics and sophisticated real world economies

• Facilitate and evangelize the sale of derivatives which will with mathematical certainty help to stabilize the economy of their underlying digital markets

• Spark a conversation that goes beyond technical analysis, DeFi, ReFi and every other type of Fi, to inspire better minds than my own to study decentralized macroeconomics
  
  

WHY NFTS

Everything can be seen as fungible or non-fungible- for example your pet fish vs. a fishstick. What is unique is prior to that which is not. Derivatives must start with and build upon that which is most truly non-fungible ie. NFTs.

NFTs are not derivatives because they are the actual value stores upon which derivatives are based. The primary derivative on the blockchain is a note against an NFT. All native digital derivatives are built upon NFTs. 

NFTs are the real estate of the blockchain. This is not to be confused with virtual worlds. The true value of real estate is based on consensus, not in looking like a real house. All NFTs are the real estate of the blockchain, not just metaverse lands.

WHY DERIVATIVES

Derivatives extend the monetization of assets without giving up ownership. With the power of derivatives less owners list the primary asset for sale on the open market. Why buy the cow when you can get the milk for free? And when the supply goes down, the price goes up.

Derivatives not only contribute but multiply investments in digital assets. If an NFT is wroth 100 ETH, equity-backed liens for 90 ETH would nearly double the amount invested in the same asset. Insuring, packaging, and other derivatives have a similar effect, and such investments are multiplied in more or less the same ratio as the number of tiers of derivatives backed by an asset. This phenomena has a positive effect on the entire market

DERIVATIVE TYPES AND TIERS

Types of derivatives include liens, fractionalization and guarantees. Shares in Microsoft are an example of fractionalization. An option, whether put or call, is a guarantee as is any type of insurance. Buying and selling short or long are all derivatives based on lending.

Synthetic derivatives have no claim to the underlying asset, and should be classified as gambling rather than investing because they are essentially putting money into nothing. They cause havoc rather than good to markets.

Complex and compound derivatives combine two or more functionalities of derivative types, such as a loan with set guarantees, a derivative of a derivative, or a package of several derivatives of the same or different types. But unlike synthetics, they are still equity-backed by a primary digital value store ie. an NFT.

DECENTRALIZED P2P LENDING FOR NFTS

When you go into a bank in the U.S. to get a loan, the bank shops the loan to third parties who fund the loan, so while it's not truly peer to peer (there is a broker in the middle) it is close to P2P because market competition between third parties to fund your loan helps you get better terms. This element of competition is almost completely missing in automated lending pools, and is why many DAOs which look friendly on the surface actually contribute to a centralized top down hierarchical economy.

Ape Harmony is a market-based peer-to-peer system rather than a lending pool. Just as the user experience is the same if you make a purchase from a third party seller on Amazon or from Amazon itself, it will be equally seamless on our platform whether you purchase from Ape Harmony directly or a third party on the marketplace.

Rather than buying NFTs themselves, the purpose of the Ape Harmony marketplace is to buy and sell derivatives of NFTs such as liens and loans. All terms are controlled by the two parties, so it is up to the user to decide on his or her risk level for each loan. Ape Harmony designs and offers the tools, but we do not make the loans ourselves, nor do we have a pool or DAO that makes those loans in a top down way.

BENEFITS FOR BORROWERS (NFT OWNERS)

1. Eliminate the risk of auto-liquidation. Unlike other lending protocols, Ape Harmony enables lenders and borrowers to work together in way that is beneficial for both sides with no risk of auto-liquidation.

Daily fees and late payment penalties are not necessary to make a profitable loan for both sides. The powerful guarantees and discounts possible on Ape Harmony open up entirely new ways of speculating on the lending market. If both parties agree to no daily fee and therefore no late payment penalty, there is no risk of liquidation because the only person who can initiate a sale is the owner of the NFT regardless of how many liens against it.

2. Keep your NFT in your wallet. Another major drawback of lending pools is that the owner has to transfer the NFT out of his wallet into the pool's wallet. Not only is this psychologically difficult but the owner gives up utility like being able to sign in to third party sites. This also provides greater security because the wallet holding your valuable NFT will only be whitelisted to transact with safe address and call safe functions which provides more peace of mind witihout taking away control.

Having your NFT in your wallet rather than some shared deposit vault, means you get all your free airdrops and can claim your free plus gas NFTs often worth thousands of dollars which are impossible to receive when in a shared pool. Ape Harmony requires a transfer of the NFT to a new address, but that address will be a smart contract wallet the owner controls. The owner can use it just like any wallet, but can't transfer the NFT out until the loans are paid off.

BENEFITS FOR LENDERS (LIEN HOLDERS)

1. When a user funds a loan against an NFT, he receives a lien NFT (claim to value) on a highly desirable asset such as a Bored Ape. This provides a low price of entry for users without the means to purchase a Bored Ape NFT outright. The lien NFT's value is truly tied to and backed by the underlying NFT it is lending against, unlike synthetics which merely bet on the price of something they do not have a vested ownership in.

2. Ape Harmony has powerful guarantees which allows lenders to speculate on liens by purchasing them at a discount, but are cashed out at full price when the lien is dissolved. This discount shopping strategy is much more powerful than a simple accrued interest model. Imagine buying something for 8 ETH which according to the terms of the loan must be cashed out at 10 ETH if the NFT sells at the same floor price.

3. Ape Harmony lien NFTs receive certain ownership benefits without corrupting the integrity of the original NFT as is the case with fractionalization. Ape Harmony plans to build a bridge to an L2 like Polygon for lien NFTs to trade at lower gas prices and even sell on platforms like Instagram. This means Lien NFTs on Ape Harmony will be the first true Polygon Bored Apes with real value backed by equity in the original NFT, and without corrupting the integrity of the original through fractionalization.

ROAD MAP

Equity-backed simple liens are only the first phase for Ape Harmony. From here we plan to extend the functionality to all types of derivatives (not including synthetics which are not real derivatives but only bets on the market). This will include short and long margin position opportunities, insured assets, and packages of more complex financial instruments. We will create many types of derivatives which are only possible because of the innovations of decentralization and automation, but always inspired by the balance and counter-balance of high value assets prevalent in traditional finance.

We sincerely believe that by applying this methodology to decentralized finance will have a net positive effect on the entire blockchain economy, bring more users to adopt cryptocurrency as a viable option, and enable institutional finance entities to enter the market because with such an array of derivatives all backed by a primary asset they will be able to manage their risk profile in the same way they do when they invest in real estate or pork bellies. Financial institutions don't buy houses, so we should not expect them to buy Bored Apes either. But they do invest in REITs and other kinds of packaged derivatives of real estate. We expect to see the same with Bored Apes, and we have our bananas ready to welcome them!