[Company Watch] Mirror Protocol

Mirror Protocol is a synthetic asset trading protocol launched by Terra Finance, the Korean blockchain company. The protocol allows users to create a collateralised deposit position, like that of MakerDao, to synthesize a number of assets that imitates the stock price movements of large public listed companies like Apple or Tesla, or Gold and Silver. The product is also now giving out its platform tokens are mining rewards, MIR, with a generous APY of 200% to 300%.

​We do not elaborate how to mine MIR to earn the rewards, as there’s sufficient guide in the official discord channel. It’s also not different from how you mine Sushi on Sushiswap. In this article we wish to highlight a few differences and therefore inform investors the risks justifying the high-yield:

Terra’s Native Stablecoin has to be Used for the Investment.

Investors have to deposit into pool 1 and pool 2 of Mirror Protocol using pairs with UST. UST is the native stablecoin of Terra. UST can be minted or cancelled at 1 UST to 1 USD, by depositing or burning Terra accepted collaterals, such as Terra’s own platform token or its reserve token. Details on how UST is stabilized can be found here: https://messari.io/asset/terra/profile Historically, UST has a relatively stable peg to USD, despite its short history.

MIR, the Platform Token has Volatility

As there is not yet a meaningful utility for MIR, it’s value is currently uncertain. It’s price is a matter of demand and supply: people buying MIR to earn the high MIR-UST pool yield (500%~1000%) and people who cash out their MIR rewards from other pool 1s. Based on the experience of Sushi, whose price started off from $2.70 and varied from $0.47 to $8.8, the volatility of MIR would be high as well.

​The Synthetic Assets Are not Hard Pegged to the Underlying

Anyone can create a synthetic Apple or Tesla share by simply depositing enough collaterals on https://terra.mirror.finance/mint#open , Mirror Protocol’s Terra-chain (based on Solana) version. The logic is identiical to what you can do on MakerDao or Compound. Mirror Protocol reads oracle prices of these stocks from NYSE, using Band Protocol. A position will be force-liquidated if the oracle price of the underlying stock exceeds the Collateral Ratio of 150%.

​Subsequently, one can trade on https://terra.mirror.finance/mint#open or https://eth.mirror.finance/ the minted synthetic assets. If one wishes to close the position earlier, he can do it by burning the amount of assets borrowed, to redeem the collaterals. Therefore, there’s no arbitraging mechanism here to maintain a hard-peg of the synthetic asset and the underlying stock price. The price stability is based on the assumption that there’s demand for the synthetic assets: if the market price (Uniswap pool prices) are lower than the oracle prices, investors will buy; if the market prices are higher, investors will mint. And the demand is supported TEMPORARILY by the high yield of 200% to 300%.

Conclusion

In a nutshell, we feel that Mirror Protocol is an innovative product. Using UST as the main currency is an acceptable design, given Terra’s track record in Korea and its success of KRT, the Korean currency version of stablecoin. From there, investors are rewarded with 200% to 300% APY if they are willing to take the volatility of the synthetic assets. Further, if investors are taking the risks of MIR, the reward can be over 500%. A good bet for people with good risk appetite.

(Serenity Team, 10 Dec 2020)