Minting Not Properly Incentivized

Apologies if this has been fully addressed by other threads, but I don’t have time to browse every thread on this forum to see what everyone suggests.

The two main complaints I hear from Mirror users who want to see adoption increase are that:

  1. governance rewards are too low
  2. premiums on mAssets are too high

These issues are not the problem, they are consequences of the system in place. The problem is that minting is not properly incentivized, nor is it understood well enough by most users.

Minting is the backbone of everything on the platform. Suppose a new mAsset gets listed, mVISA for instance. Before someone mints tokens and pools+stakes them, there is no liquidity pool available for people to buy synthetic Visa. If there are only a few tokens printed, the slippage on buying them is enormous because of the X*Y=K formula used by liquidity pools (which means there is always liquidity because the price of buying all the tokens is infinite), which creates a large gap (premium) between the terraswap price and the oracle price of the mAsset.

So here’s the process: people mint tokens and pool them in order to create a liquidity pool for others to be able to buy the asset. Minting is essentially taking a short position against the asset in exchange for the fees and to provide liquidity for others. If the premium is too high, rather than pooling the minted tokens, someone can mint tokens and then sell them directly to an existing liquidity pool and hope to buy them back at a lower price and then burn them. However, since the minimum collateral ratio is 150% for most mAssets (and 200% for mCryptos), the premiums are capable of reaching 50-100% above oracle prices because users can directly arbitrage by minting, instantly selling for profit, and letting the mint position go. Then, when a mint position is closed, a 1.5% haircut is taken and the rewards from that go to governance.

As you can tell from that description, incentivizing minting accomplishes a lot of things:
-more people mint tokens
-this generates larger liquidity pools, which have less slippage in the price of an asset when buying, which means lower premiums
-more minting, trading, and use of each mAsset increases fees on the network, which increases the price
-more minting positions opening and closing means more rewards for governance
-more rewards for governance means more incentive for people to hold tokens rather than instantly sell them for higher APR vehicles on the site

I haven’t proposed a concrete solution to this problem because it’s a tricky problem and any attempt at a solution could have unforeseen second, third, and fourth order consequences on the rest of the site. I expect most of these consequences to be things we want, but I can’t say that for certain. The purpose of my post is not to shove a solution down your throats, but get everyone to recognize that many of the problems can be traced directly back to not enough minting.

Perhaps something like sushiswap has with its rewards – 5/6 of the fees go to LPs, 1/6 goes towards minting/governance combined. Perhaps changing the tokenomics more directly so that minters share a percentage of the newly minted MIR tokens. It just must be the case that minters are properly compensated for the risks they take, particularly with opening short positions on assets during a face melting bull market, because as of now, very few want to do it, and those that do are basically just acting as good samaritans.

Thanks for contributing , you should really dig what’s already been discussed in the other threads (or we should make it more structured on the forum) as your observations are in line with those of everyone else.

Have a look at the main thread to see what avenues are being explored to solve the v1 issues of Mirror