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Looking in The Mirror

Dec 29, 2020 · 13 min read

By Jonathan Erlich

I know, I know. Mirror is not the newest kid on the DeFi block anymore (looking at you 1inch and The Graph – enjoy your 15 minutes of fame :). However, the protocol has recently announced some exciting developments and partnerships that I think are Daily-worthy (and may have gone unnoticed among all that happened the last few weeks). For the uninitiated, Mirror is a synthetic assets protocol built on top of the Terra blockchain. Upon its launch, it gained notoriety and generated excitement as it’s the first of its kind to offer on-chain price exposure to US stocks. Under the hood, though, there’s much more to this protocol. In this piece, I’ll explore the present of Mirror and dive into some recent developments that shed some light on what the future of the protocol might look like. If you’re already aware of how the protocol works you can skip the first sections and jump directly to the “Governance: More Assets, Please” section.

How It Works

There are two main pieces to the protocol: 1) The mechanics that underpin the creation, liquidation and pricing of synthetic assets; and 2) The MIR token, which is the native token of the protocol.

Let’s explore each of these parts:

  • Creation/Minting: To mint synthetic assets (called mAssets in Mirror) a user must lock up at least 150% of the value of the mAssets in Terra stablecoins or other mAssets as collateral. The assets locked up as collateral are what back the value of the mAsset. A user can unlock the collateral provided to the system at any time by providing the minted assets back to the protocol, which are in turn burned.
  • Liquidation: The liquidation mechanism is what guarantees the protocol is always solvent. With the current parameters, this means that there is at least $1.50 USD in collateral backing every $1 USD in assets created. The protocol achieves this by liquidating the collateral of any user whose collateralization ratio goes below 150%, which can happen if the value of the minted assets rises and/or the value of the collateral decreases. It’s worth noting that, as Terra offers higher throughput and lower fees than Ethereum, liquidations can happen more quickly and thus, extreme market conditions (such as the March 13th market crash) could be handled more swiftly.
  • Pricing: To guarantee mAssets follow the price of the underlying assets they represent, the protocol uses external price feeds provided by oracles to create incentives for users to keep the prices in line. At any given time, any user can mint/burn mAssets at the price provided by the oracle. Thus, when the market price drifts significantly from the oracle price, an arbitrage opportunity emerges for any user as they’ll be able to buy and burn or mint and sell mAssets and make a profit in the process. 

In addition to the above mechanics, an important part of the system is the MIR token, which provides governance and cash flow rights to its holders. On the governance side, it gives users who stake the token the right to change system parameters and propose new assets to be listed on the protocol. On the cash flow side, the protocol charges a 1.5% fee whenever a user closes a CDP (burns mAssets to retrieve deposited collateral). All of these fees are then distributed to MIR token stakers.

Another important aspect worth mentioning is that, from the onset, the protocol launched on Terra and Ethereum (great move). While the main functionality of the protocol lies within Terra (minting and redeeming of mAssets), the protocol built a bridge to Ethereum, properly called the Terra Shuttle, that allows for any Terra assets to be seamlessly sent to Ethereum (more on this experience later). Currently, all mAssets have ERC-20 representations on Ethereum. This has allowed Mirror to attract both Ethereum and Terra users to its platform from the very beginning.

Distribution and Liquidity Mining

Total MIR supply is capped at 370.575M tokens and is planned to be distributed over a 4 year period. For its distribution, the team chose a fair launch approach in which none of the tokens were allocated to themselves or investors, but would rather be distributed through airdrops to adjacent ecosystems and an ongoing, 4-year long liquidity mining campaign.

Taking advantage of its Ethereum and Terra presence, the protocol decided to airdrop its initial supply (54.9M tokens) to both LUNA stakers and UNI holders (and another part to the community pool for use in the future). This is a clever choice as both Uniswap and Terra play an important role within the Mirror ecosystem. The role of Terra is obvious, as Mirror is built on top of it, so the airdrop is a nice thank you message to Terra backers. The Uniswap airdrop is more interesting though. On the one hand, by airdropping to UNI holders Mirror automatically connects with one of the largest communities on Ethereum. On the other hand, Uniswap is used within Mirror on the Ethereum side – both for trading and staking as part of the liquidity mining campaign (more on this later). As such, the UNI airdrop can also be seen in a similar light to the Terra airdrop, in the sense that Mirror is thanking UNI holders for using their protocol within its ecosystem. Overall, nice move and I expect more protocols to follow suit.

The rest of the tokens will be distributed through a continuous airdrop (to LUNA stakers and the community pool) and an ongoing, 4-year long liquidity mining campaign. The latter though, holds by far the largest portion of the distribution, as more than 55% of the total token supply will be distributed this way. The following table summarizes how the distribution will be allocated going forward. Besides what’s already been mentioned, it’s worth noting the high year 1 issuance (233%), which may put some downward pressure on price in the short-term.

Source: Mirror

The following graph summarizes how the final distribution looks like. Note that, after the liquidity mining rewards, the highest share of the allocation will go to the community pool, which will effectively be a community managed treasury.

Source: Mirror

The liquidity mining campaign is already live on Terra and Ethereum. For DeFi farmers, the procedure to participate is fairly straightforward; interested farmers just need to provide liquidity for MIR/UST or any mAsset/UST in Uniswap (or Terraswap on Terra) and stake the LP tokens in the Mirror platform. There are currently 13 mAssets listed on the protocol which include popular US stocks and indexes. Current APRs are in the triple digits and can be checked here (Ethereum) and here (Terra).

Having launched less than a month ago, the success of the campaign is already evident, as Mirror now boasts more than $70M in TVL, more than $30M in liquidity across its mAssets and is currently facilitating more than $1M in mAssets trading on most days. Note that this stats only account for the Terra side. As such, current combined metrics between Ethereum and Terra are larger. Unfortunately, there’s still no straightforward way to generate consolidated traction metrics for the protocol on Ethereum (I may come back with a Part 2 whenever this happens :).

Governance: More Assets, Please

Governance has been really active during the last few weeks, with 30 proposals already submitted at the time of writing. 28 of these are related to whitelisting new assets on the protocol. Most of the proposed new listings are popular US stocks such as McDonald’s, Goldman Sachs and Intel Corporation. A few exceptions that are currently passing are Bitcoin and Ethereum, which suggests that the protocol may soon incorporate synthetic crypto assets as well as real world assets. This is an exciting development, as it not only extends the (limited) list of mAssets offered by the protocol but also the types of assets listed. To put this into context, Mirror will offer exposure to 38 real world assets if the current vote holds, while FTX – a popular cryptocurrency exchange – currently offers exposure to 31 US stocks and indexes. Going forward, I expect this proliferation of mAssets and mAsset types to continue.

The other proposals touch on reducing the voting period (passing) and adjusting the token distribution (not passing).

Harnessing the Power of DeFi: Better Stocks and Cooler Indexes

Do Kwon, leader of the team behind Mirror (and Terra), recently shared the following slide on Twitter. I just love to see it! It not only shows what the future of Mirror might look like, but also highlights the power of DeFi.

So, what is it that we’re seeing? On the one hand, it is the design of what could be yield bearing stocks. By integrating with Anchor (a lending protocol soon to be launched by the Terra team), Mirror could accept yield bearing USD (aUSD = Anchor USD) as collateral and use that yield to buy more of the mAsset that the collateral is backing, thus creating the first yield bearing stocks in crypto. How cool is that? I expect this integration to work both ways though. Not only will Mirror accept aUSD as collateral, but I can also see Anchor accepting mAssets as collateral.

On the other hand, what we see is what could be the birth of a proliferation of interesting and crazy tokenized indexes in DeFi. With what we’ve already seen so far in DeFi with the growth of index protocols and products, imagine what incorporating stocks (and all sorts of real world assets) could do to this trend. I mean, the “Hipster Index Token” is cool, but a “Long Bitcoin, Short the Bankers Token” – that included Bitcoin, obviously, but also short positions on the main US financial institutions – is something else. Just imagine the possibilities here.

Harnessing the Power of DeFi: Stock Futures

A recent announcement that got me excited was the partnership with Injective Protocol, a Cosmos-based derivatives DEX. The crux of the partnership is that Injective will be integrating mAssets into its platform to allow its users to trade US stock futures. The first markets to be open for trading on the platform will be Tesla, Airbnb, Google, and Amazon. Even though there’s not much additional information around the partnership, to me it highlights what value-adding partnerships look like.

As Do put it: “We’re entering a significant new phase for DeFi, particularly cross-chain DeFi, where porting TradFi assets onto permissionless blockchains augments their characteristics with composability. Collaborating with Injective and Band Protocol, we envision DeFi consisting of decentralized derivatives markets that reflect any TradFi asset side-by-side with crypto — fueled by the accessibility that blockchains afford a global set of users.”

Harnessing the Power of DeFi: A Proliferation of Wallets?

If the Terra team has made something clear, it’s that they can seamlessly bring crypto to the masses. Their Chai app – an e-commerce platform – is used all around Korea by users that have no idea the Terra blockchain underpins the whole system.

And I think that’s the vision they’re pushing for Mirror as well: expanding its usage beyond the crypto world, which makes sense; current DeFi users are estimated to be around 300,000 while there are millions of people trading on Robinhood, eToro and other mainstream trading platforms. Let’s grow the pie!

A recent thread by Do outlines the plan for this to happen. It basically hinges on two main parts: 

1) Making the Mirror Wallet – a recently developed mobile app that allows users to trade mAssets seamlessly using fiat or crypto – open source; and 2) User farming: Incentivising developers who fork the wallet and acquire users that trade mAssets.

Additionally, app developers will be able to use all the building blocks that are being created around Mirror (hipster indexes, yield bearing stocks, etc…) to make their product suite much more compelling. I don’t know whether Do’s plan will work, but I think ambitious visions such as this one are what’s needed to bring the masses to crypto.

Main Concern: Regulation

The main concern I have with Mirror is with regards to regulation. And it’s a very real concern. There’s already been precedent of US authorities cracking down on companies offering synthetic asset exposure to their clients. Abra was the first company I know that offered this product (I was very excited at the time). However, they were barely able to launch when they got a cease-and-desist order from the SEC and the CFTC. The order finds that “these contracts were security-based swaps subject to U.S. securities laws.”

One key difference here is that Mirror is a decentralized protocol, not a company. If the SEC or the CFTC were to crack down on Mirror, how would they go about doing it? They could definitely go after Terraform Labs, the company that launched the protocol, but that would be a mute effort, as the company has no control of the protocol; it’s already launched and part of the decentralized wilderness. They could also go after the creators of the wallets that were mentioned in the previous section. But again, that wouldn’t stop the protocol from working, as they’re just UI’s that connect to the protocol and have no control over the protocol itself. In any case, if an attempt at a crackdown were to happen, although not welcome, it would definitely be interesting to see, as it may shed some light on what the future of decentralized protocols regulation and enforcement might look like. In the U.S. just the threat that the government may go after users could seriously hamper growth, but this is all TBD.

Now, I’m no lawyer and I’m far from a regulation expert. I may be completely off here. I just wasn’t comfortable publishing this piece without mentioning the Abra case and how I see it in relation to Mirror.

An After-Thought: A Multi-Chain Future?

One of the most impressive things for me when using Mirror was the absolutely seamless experience when transferring assets from Terra to Ethereum. At the beginning I didn’t really know how to do it. I couldn’t find a dashboard or place to transfer assets from Terra to Ethereum. I looked in all the places within the Mirror UI and nothing. So I just winged it, put my Ethereum address in the recipient space of my Terra wallet and waited for an error message (since that couldn’t just work). To my surprise, no error message. And some time afterwards, the assets were on my Ethereum wallet. Just like that. Felt like magic!

That made me think about the future, and specifically about a multi-chain future. If the future holds seamless inter-chain experiences such as this one, why wouldn’t we use multiple chains; it’s only natural. I know this is anecdotal and 100% intuitive (and 100% not based on hard science or thorough analysis), but I think there’s a lot of value in such experiences. At the end of the day, there’s no amount of data more powerful than just trying a product and being impressed with it.

And if you don’t believe me, take a loot at what Robert had to say (which also made me think about the rationale behind Compound Chain – but that’s a topic for another Daily):

The end. Thanks for reading!

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