AIP-363: Unlocking $APE’ potential: Building a credit market with MYSO Finance

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PROPOSAL NAME

Unlocking $APE’ potential: Building a credit market with MYSO Finance

PROPOSAL CATEGORY

Ecosystem Fund Allocation

TEAM DESCRIPTION

At MYSO, we are changing the way users borrow and lend. Our mission is to become the Amazon for crypto loans, where users can find a vast selection of loan options like nowhere else. By using the so-called Zero-Liquidation Loans primitive, we bring together borrowers who don’t want liquidation risk with lenders who want exposure to a payoff similar to a covered call.

Our core team comes from a varied background of finance and engineering and has several years of professional experience in crypto. We have a deep understanding of both DeFi and TradFi (in particular financial derivatives), which allows us to synthesize concepts from both worlds.

  • Aetienne, Founder & Developer
  • Jamie, Lead Full Stack Developer
  • Mykola, Senior Full Stack Developer
  • Denis Golub, Growth and Research
  • Matan, Designer
  • dominic, Operations and Partnerships & Author of this proposal

ABSTRACT

MYSO Finance is building a novel peer-to-peer DeFi lending and borrowing protocol, using Zero-Liquidation Loans (ZLLs). ZLLs are a novel DeFi primitive that allow (i) borrowers to borrow without liquidation risk and (ii) lenders to lend in underdeveloped credit markets with higher yield potential.

For DAOs, ZLLs are a powerful new tool to increase the utility of their native token and to enable them to use their reserves in a more productive and strategic way.

We propose the creation of a lending market for $APE, utilizing MYSO’s v2 protocol. This initiative can offer community members access to non-liquidatable loans, thereby enhancing the utility of the $APE token. If there is confidence in the continuous growth of $APE and a desire to offer more incentives to $APE token holders, establishing a non-liquidatable lending market is an effective way to achieve this objective.

BENEFIT TO APECOIN ECOSYSTEM

By using above described convertible Zero-Liquidation Loan product, it is possible to::

  • Create credit markets for the $APE token without lengthy governance processes, oracle integrations, etc.
  • Lend treasury reserves in a more strategic way that creates value for the overall community.
  • Provide a unique borrowing experience to the ApeCoin’s community, without liquidation risk.
  • Reduce selling pressure for the $APE token and incentivize long-term holding.
  • Fully customize and control the loans one underwrites.
  • Signal high conviction on the $APE token and participate in a possible synthetic buyback strategy.

SPECIFICATIONS

Using MYSO, it’s possible to offer fully customizable loan options to $APE token holders by simply setting up a lending vault and specifying the loan terms desired for lending.

For example, the grant recipient (i.e. Governance Working Group [GWG], see below) could set up a vault to lend out USDC (or any other token) and accept its native $APE token as collateral. The GWG can create multiple loan offers concurrently and define at which LTVs, tenors, and interest rates they’d feel comfortable lending. Updating/deleting these loan offers is also possible in a matter of minutes.

From a financial risk-reward perspective, the lender bears default risk that a loan may become undercollateralized and not be repaid. This resembles a deep in-the-money covered call strategy with a low delta. It’s worthwhile to mention that the risk premium is set by the GwG and can be hedged outside and independently of MYSO, if needed.

MYSO’s protocol fee starts at 0.1% and scales linearly to +0.4% for a loan with a duration of 1 year. To illustrate, the protocol fee for a loan with a 90 day tenor would therefore be at 0.2% of the collateral amount. Worthwhile to highlight that MYSO’s protocol fee is currently set at 0.00%.

MYSO v1 was deployed on Ethereum in January 2023. MYSO v2 was deployed on Mantle end of August 2023, on Ethereum end of September 2023 and on Arbitrum mid of October 2023. As of today, MYSO has a $1.25m TVL.

Other organizations that have successfully implemented MYSO’s lending protocol include:

  • Olympus DAO ($500k pilot project for a gOHM/DAI lending market)
  • Mantle (created a lending market for $MNT), Rocketpool (we launched the first RPL/rETH credit market for their community)
  • Pendle (seeded a lending market for PT-sDAI Token), IndexCoop (to seed a lending market dsETH)

KEY TERMS

  • Zero-Liquidation Loans (ZLL): Zero-Liquidation Loans are crypto-collateralized loans that are non-liquidatable. This means that borrowers will not have their collateral liquidated in case of market downturns or other risk factors. There are no liquidation thresholds and health factors to consider and borrowers can always reclaim their collateral as long as they repay their loan before expiry
  • Loan-to-Value (LTV): Loan to Value is the ratio of a loan amount to the value of the collateral asset, expressed as a percentage
  • Liquidation: In DeFi, a liquidation is the forced closing of a loan position that occurs when the value of a borrower’s collateral falls below a certain (liquidation) threshold
  • Covered Call: A covered call is an investment strategy where the investor sells call options (i.e. the buyer has the right but not the obligation to buy this asset) on assets they already own to generate income from the option premiums
  • Buyback strategy: A buyback strategy in DeFi directly involves repurchasing an asset to reduce its supply and potentially increase its value

PLATFORMS & TECHNOLOGIES

MYSO v2 smart contracts (three comprehensive audits: Trail of Bits, Omniscia and Statemind) deployed on Ethereum. To date, there have been no instances of bugs or exploits identified in MYSO v2.

STEPS TO IMPLEMENT & TIMELINE

The following steps are necessary to set up an $APE credit market and can be completed in under one hour:

  • Governance Working Group to create a lender vault on MYSO v2
  • Governance Working Group to add the respective lending currency to the newly created vault (e.g. $USDC).
  • Governance Working Group to create fully customizable loan offers/quotes by defining the accepted collateral currency (e.g. $APE), the lending currency (see previous step, e.g. $USDC), the loan tenor, the LTV and the fee structure (see screenshot below). It’s important to highlight that MYSO has created a Loan Risk Tool as well as a Loan Pricing Tool to support the GwG creating these quotes. Moreover, MYSO would also be more than happy to offer bespoke support in creating these quotes.
  • Governance Working Group to delete/update loan offers/quotes where they see fit
  • Once the loan offers are created, the proposal is to be considered fully implemented (after the GwG have created a vault and added the $USDC). The idea is to have a lending market for $APE that endures over time, thereby also increasing utility for $APE holders. So although the AIP can be considered implemented after the loan offers are live, it’s actually the beginning of the process where the AIP begins to add value to the community.

It’s important to emphasize that MYSO is built with utmost flexibility in mind. MYSO not only supports multi-sig setups but also offers the option for the GWG to delegate loan quoting to an on-chain representative, where the GWG would only need to sign off the already created quotes. Additionally, there is also a whitelisting function that allows the GWG to create customized loan offers that can only be executed by eligible borrowers.

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OVERALL COST

$750,000 USD

In order to enable meaningful borrowing capacity, MYSO would recommend seeding $750k. It’s important to note that the GWG retains full control over their lender vault, as well as the credit markets and loans they underwrite. The GWG also has the flexibility to withdraw their funds at any time, excluding the portion currently being lent out, or add more funds to their lender vault if they wish to do so.

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Can you ELI5 how ZLLs work?

Is there an an example of a similar DeFi protocol using ZLLs and/or MYSO v2 that you can point to as an example of how this works?

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Thanks for your questions,@LiveFast9986! So basically Zero-Liquidation Loans are crypto-collateralized loans that are non-liquidatable. This means that borrowers will not have their collateral liquidated in case of market downturns or other risk factors. Compared to Aave et al, borrowers don’t have to pay attention to any liquidation thresholds or health factors and will always be able to reclaim their pledged collateral as long as they repay their loan before expiry.

On the other hand, lenders are bearing the risk that a loan may become undercollateralized and not be repaid and they earn a yield premium for doing so. The associated risk-reward profile resembles that of an in-the-money covered call position, which is a well-known conservative yield enhancement strategy. Consequently, lenders can create their own peer-to-peer market for any token and define their own risk/terms for every loan offer that they make!

ZLLs therefore act as a mutually beneficial risk transfer mechanism, in which the loan liquidation risk is transferred from the borrower to the lender, and the lender thus earns a yield for bearing this risk.

Because Zero-Liquidation Loans are quite a novel primitive, there are not too many examples, and the few examples that do exist take a bit of a different approach. Having said that, we have prepared a detailed walkthrough video on how to borrow on MYSO v2, how to lend and how to price Zero-Liquidation Loans.

I hope that answers your questions – if not, pls let me know, happy to walk you through in more detail.

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This was great as explanation, albeit pretty much over my head.

I’ll watch the videos, but I hope that your response actually helps someone more knowledgeable than I am in better understanding and being able to provide better insight.

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Hi @LiveFast9986 , I appreciate your feedback, and apologies if I couldn’t provide a clear explanation. Let’s go through an example to help you understand the concept of Zero-Liquidation Loans:

Assume you hold $100 worth of $APE in your wallet and you need some short-term liquidity but don’t want to sell your $APE as you are super bullish on $APE and its ecosystem. You essentially have two options:

  1. You can use a traditional DeFi lending platform, pledge your $100 worth of $APE and borrow e.g. 60 USDC (60% LTV). Traditional lending platforms have a liquidation threshold in place: if the price of $APE falls below a certain threshold, for instance, let’s say 65% in this example, the platform automatically sells your collateral/your $APE tokens to cover the outstanding loan. Now, let’s assume the price of $APE drops to $63 but then quickly rebounds to $85 the next day. In this case, your collateral would have been sold to cover your loan, and you wouldn’t be able to get your $APE tokens back.

  2. Now, let’s compare this to Zero-Liquidation Loans: When you utilize MYSO, you’d also pledge your $100 worth of $APE and receive a $60 USDC loan. The key difference with MYSO is that these loans have a fixed expiration date, and during the loan term, your collateral is never forcibly liquidated. In the previous example, even if the price of $APE drops to $63 and then recovers to $85 shortly after, you, as a borrower, will always be able to reclaim your collateral during the loan tenor (if you wish to do so).

Zero-Liquidation Loans therefore act as a mutually beneficial risk transfer mechanism, in which the loan liquidation risk is transferred from the borrower to the lender, and the lender thus earns a yield for bearing this risk. However, it’s important to note that MYSO operates as a peer-to-peer lending protocol, which means each lender defines their own risk/terms for every loan offer that they make!

Please keep in mind that this is a simplified explanation. For a more detailed understanding of how ZLLs work in various scenarios, such as when collateral prices rise, fall slightly, or fall significantly, you can visit https://www.myso.finance/, where we provide more comprehensive explanations.

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This is a simpler explanation, which is what is needed. It will definitely bring practical benefits to $APE holders. Everything, of course, will depend on the rates, whether they will be interesting in comparison with other platforms. But zero liquidation in this case will give a significant advantage

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So it operates the same way that NFT-collateralization platforms have already been operating?

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hi @StrawberrySith yes correct, the underlying no-liquidation mechanism is quite similar with NFT-collateralized platforms!

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Hi @dominic,

The community feedback period for your proposal would be ending in approximately 24 hours.

  • If you’re content with the feedback received, your next steps are to finalize your proposal using the AIP Draft Template.

  • A moderator will reach out to the author to finalize the AIP Draft. Upon receipt of the final Draft, we will review and provide instructions on the next steps.

  • Are you ready to proceed to the next phase or do you wish to extend community discussion for another 7 days?

We look forward to hearing from you.

-@Facilitators

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hi @Chris.Admin thanks for following up on this. From my perspective, we can move forward with this proposal (should already be in the right format/template). Please let us know if there is anything else needed from our side to proceed. Looking forward to next steps & best regards, dominic

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This topic was automatically closed after 7 days. New replies are no longer allowed.

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Hi ApeCoin DAO Community,

@dominic has completed editing their AIP Idea to be their AIP Draft.

Follow this Topic as further updates will be posted here in the comments.

Kind Regards,

-@Facilitators

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I spent some time looking at this proposal and reading the MYSO website. Here is what I inferred:

  • Borrowers post a different cryptocurrency as collateral and cannot be liquidarted

therefore, the DAO relies on one of the following to be true:

  • The borrower repays the loan on their own free will because they’re presumably good people
  • The borrower is compelled to repay the loan because the underlying collateral has become more valuable than the cryptocurrency they borrowed

In a way this is betting against $APE? If the DAO did get into lending IMO it would be via a properly organized venture vs. directly lending out the treasury. As such, it may not be possible to move this proposal to vote as currently written.

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One other consideration is that there is some degree of risk we’re accepting when putting tokens into a smart contract. The contract is audited by a few companies but that was also the case with ParaSpace and others who have been hacked. Doing smart contracts safely is very challenging and requires a combination of defensive coding, audits, blockchain monitoring, on-going pentesting engagements, and a comprehensive response plan.

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Hi @secengjeff many thanks for taking the time to review the proposal and for your valuable comments, very much appreciated. Happy to address your comments:

Yes, that’s true – the borrower is pledging $APE as collateral and will be borrowing a stablecoin or ETH (or any other lending currency chosen by the ApeCoin DAO).

With Zero-Liquidation Loans, the borrower has the option (but not the obligation) to repay the loan. A rationale borrower will be repaying the loan if the collateral is worth more than the borrowed amount. At expiry, if the loan amount is worth more than the collateral amount, a rationale borrower would not be repaying the loan. In such a scenario, the lender (e.g., the ApeCoin DAO) can claim the collateral (e.g., $APE), akin to a buyback strategy implemented by various DAOs. However, it’s important to mention that the ApeCoin DAO is defining its own terms at which they would be lending (e.g. to reduce the risk, they can for instance define a lower LTV).

The borrower is not taking a bet against $APE. Instead, the borrower can utilize their idle $APE to borrow stables against it. If, at expiration, the value of $APE collateral is lower than the borrowed amount, a rationale borrower will not repay the loan and $APE becomes claimable by the ApeCoin DAO (there will be no market sale of $APE).

Would you mind elaborating what you mean by “via a properly organized venture”? How could that venture look like?

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@secengjeff Yes, this is absolutely true and anyone claiming that there are no risks associated with smart contracts is not being truthful.

However, at MYSO, we’re committed to maintaining the highest possible security standards for our code, ensuring that user funds are secure and that the platform is protected from different attack vectors. This is why our v2 codebase has undergone 3 independent security audits with top teams from the code security space, including Trail of Bits, Omniscia and Statemind!

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The DAO wouldn’t likely lend money but could choose to fund creation of a new entity/company that exists for the purpose of writing $APE loans.

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Absolutely, that could be another option to consider. I recently had a discussion with 0xAmplify, and they suggested that the Governance Working Group might handle these loans. I’m curious about the advantages you foresee if a distinct entity were to manage this instead?

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It keeps the DAO out of the business of running businesses. Generally speaking, I do support the DAO acting as a limited partner who contributes capital to a venture but is not involved in day to day operations.