One of the advantages of having a synthetics ecosystem is the ability to come up with new frameworks for asset classes and investment products that do not currently exist or have high barriers of entry in traditional markets. One of the main candidates is pre-IPO asset trading. Recently, FTX has listed various pre-IPO assets on their exchanges to be traded, and it has seen some success but with the downside of an external settlement party (cf. here). However, keeping true to the core of ‘decentralized’ finance, let us give a rough description of how the Mirror Protocol could offer pre-IPO mAsset trading without the need of a centralized counterparty.
A major problem encountered with dealing with pre-IPO assets on a synthetic assets platform is the lack of a trustworthy oracle price feed. We attempt to remedy this problem through a typical auctions-type process.
The following is a step-by-step process for the minting, trading, and price adjustment of mirror Pre-IPO assets through out the whole IPO process.
- When news about a specific company seeking to IPO comes out, any user can upload a
Whitelist & Register PreIPO assetproposal. This will function exactly like a combination of the whitelist and register parameter proposals that already exist (with additional parameters such as collateral ratio for pre-IPO vs post-IPO, etc.)
- Given that the proposal passes, users are able to submit a both an
offer_priceused as the reference for minting and the collateral necessary to mint the assets at the given pre-IPO collateral ratio. The amount of time allowed for submission is set by
- When a price range is published, all price submissions that fall within +/-
toleranceof the range will automatically go through with the mint at the posted price (let us say average price if given by a range). Upcoming IPO price ranges can be found form a variety of sources such as here and here.
- Trading of the pre-IPO asset is done through the existing AMM DEX just like the current mAssets.
- When the underlying asset actually IPOs, the IPO’d asset becomes automatically whitelisted on Mirror. The pre-IPO mAsset is deprecated and can be exchanged 1:1 for post-IPO mAsset, and all mint positions are recalculated at the post-IPO collateral parameter.
Let us assume that the governance for listing has passed for pre-IPO mTerraform with pre-IPO collateral ratio of 10x and a tolerance of 10%.
- During the mint period, I submit a price of 10 UST and collateral of 100,000 UST. This effectively means, that given that my price is correct, I will mint (100,000)/(10*10) = 1000 shares of the pre-IPO mAsset.
- Let’s say the estimated IPO price is published to be $11 (= 11 UST). Then all submissions with price in the range of [9.9, 12.1] are accepted and automatically minted at a reference price of 11 UST. In the case above, 10 falls in the range above, so 100,000 UST will be used to mint the pre-IPO mAsset at a collateral ratio of 10x and reference price of 11 UST. Then the real amount of shares minted is (100,000)/(11*10) = 909.090909 shares.
- Then the typical process of trading on the AMM DEX (or perhaps OTC markets) happens until the underlying asset officially IPOs.
- When the underlying officially IPOs, all pre-IPO mAssets become post-IPO mAssets which trade exactly like the already existing mAssets. Assuming current parameters, the post-IPO new mint CDP ratio would drop from 10x to 1.5x, so minters can remove up to 85% of their UST collateral.* If the price post-IPO is still 11 UST, then the total amount of collateral required would only be (11*909.090909)*1.5 = 14999.999998 UST, so I could remove up to 85000.000002 UST from the mint contract.
*Percentage varies depending on submitted price vs actual mint price.
During this process, there are a few things more to be considered by the community. The following list is not exhaustive.
- Do we allow the cancellation of submitted prices/collateral during the mint period?
- Should minting always be open until the actual IPO happens? If not, the supply is fixed after the estimated prices are published.
- As a follow-up to previous question, the initial public offering price can be revised several times, so how would this be reflected on-chain? Given that pre-IPO mAssets would have already been calculated and minted, do we simply ignore the new information?
- Do we allow for the staking of pre-IPO asset LP tokens? Empirically, the price of an asset right after IPO tends to rise in price, while minting (and then selling the pre-IPO asset) is a short on the asset. To incentivize a larger supply of the pre-IPO asset, perhaps we can consider increased MIR rewards for staking to indirectly incentivize supply (read: minting).
- Given that outside prices are used once during the whole process (minting calculation stage), how do we reckon the prices used to determine the CDP ratio in the automatic liquidation process during the pre-IPO trading period? If we use the DEX prices, there probably will need to be some sort of grace period where CDPs cannot be liquidated so that price discovery can be adequately determined on the DEX.
- High collateral ratio
A simple comparison of the original IPO process vs. Mirror IPO process is attached below.
Please note that this is just a rough description of my personal thought process, so I would appreciate any community feedback and discussion.