High Premiums and Rewards

Overview

As I’m sure a lot of people have noticed, the premiums on many assets are in the double digits. Worse yet, they seem to be rising. There are also some mAssets that have 10X less liquidity than the top mAsset: mAPPL. Both of these factors limit Mirror’s adoptability.

To mitigate this, Mirror should be encouraging users to keep mAssets on peg and rewarding Liquidity Pool (LP) providers for providing liquidity to assets with low liquidity.

Below are details on issues around certain assets, as well as some potential solutions. For a TLDR, see all items in “Solutions - Lowering Premiums” that don’t have a “[Already Live]” tag.

Troublesome Assets

mAPPL

  • Has a premium pretty close to 0% most days, which is great.
  • Has the highest liquidity of all mAssets.
  • Current return rate of 22.43% for staking a long position.

The asset is nominal - high liquidity, and on peg.

However, why is there a 22.43% APR for LP staking? Mirror’s resources would be better spent elsewhere.

mNFLX

  • Has a premium of 15.56%.
  • About 2/3rds the liquidity of mAPPL.
  • Current return rate of 18.78% for staking a long position.

The premium is really high, so why isn’t it going down? Anyone who is interested in shorting the asset likely has already done so. If you’re long Netflix and earning 19.29% on your position, you’re likely not going to sell. At the end of the day, there is no sell pressure.

Why is there a 19.29% APR for LP staking? Mirror’s resources would be better spent elsewhere.

mKO

  • Has a premium -12.51%
  • About 1/3rd the liquidity of mAPPL.
  • Current return rate of 13.48% for staking a long position.

The premium is really low, so why isn’t it going up? Anyone who is interested in providing liquidity and earning yield has likely already done so. From what I understand, users are shorting mKO with aUST so they can earn higher yield than Anchor alone with relative safety.

Increasing the APR for LP staking will likely not correct the de-pegged premium.

Solutions

So far, Mirror has been relatively successful in keeping mAssets close to peg because it encourages buyers when the price is too low, and it encourages sellers when the price is too high. However, the approach isn’t balanced. Fundamentally, if the pressure to buy doesn’t match the pressure to sell, then no equilibrium can be reached.

Lowering Premiums

The key to addressing this is to ensure we have mechanisms to both encourage and discourage sellers and buyers to reach such an equilibrium:

mAsset Too High mAsset Too Low
Short Encourage Discourage
Long Discourage Encourage

Sellers - mAsset Too High

Encouraged by:

  • [Already Live] Being able to short an asset with a positive premium.
  • [Already Live] Getting high APR long term short positions.

Sellers - mAsset Too Low

Discouraged by:

  • [Already Live] Getting low APR on long term short positions.
  • Charging negative APR on collateral. This is similar to how stock markets handle this today - if there are too many short sellers, the short interest is increased.

Buyers - mAsset Too High

Discouraged by:

  • Getting low APR on LP staking positions. Discussed more below in the “Rewarding Liquidity” section.

Buyers - mAsset Too Low

Encouraged by:

  • [Already Live] Being able to buy an asset with a negative premium.
  • Getting high APR on LP staking positions.

Rewarding Liquidity

Liquidity and long positions are intertwined as you can’t have one without the other. However, there are situations where you want to reward one and not the other, which isn’t possible. Therefore, we need to establish priority over which is more important.

Quality over quantity approach is a stronger approach, which would value low premiums over liquidity. Basically, it’s more important to have an asset on peg with lower liquidity than an asset off peg with high liquidity. With this in mind, rewards for liquidity would be as follows:

High Liquidity Low Liquidity
High Premium Low Low
Low Premium Medium High

Impact

Let’s revisit the assets listed above with the proposed solutions in mind. Also important to note, that the impact for all assets would result in a reduction of costs to Mirror as there would be less rewards distributed - which is a win for all MIR holders as well as the protocol itself.

mAPPL

mAPPL's LP staking rewards are reduced somewhat. The impact would likely be:

  • LP is reduced in size.
  • Premiums likely stay near zero.

mNFLX

mNFLX's LP staking rewards are drastically reduced. The impact would likely be:

  • LP is reduced in size, as it’s no longer profitable to hold.
  • Premiums would drop.

mKO

mKO's LP staking rewards are increased. The long term short positions are now charged negative APR on their collateral. The impact would likely be:

  • LP is increased in size.
  • Many long term short positions would close their positions, as it’s no longer profitable to hold.
  • Premiums would increase.

Final Thoughts

The math behind most of these proposals is pretty simple, but some is not. The specifics are fun and I would be happy to discuss those more. Would love to have this get some traction.

That being said, this isn’t something that you get right the first time. A number of iterations are going to be required on any attempts to stabilize assets. Such is life. We should try something though. As I finish this write up, many assets are now 15%+.

My discord is Guido12.5. Happy to answer any questions or comments.

2 Likes

I’d like to see the equal pool weights be completely replaced with a CRV style gauge with bribes.

1 Like

This plus yield farming should be paid to EITHER long or short, depending on discount/premium status, but never to both at the same time.

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!PRICE STABILITY - reducing high premium through reward rebalancing!