[Proposal] Closing spread between Terra and Oracle prices by reducing the MCR

Proposal

  • Recently, given the meteoric rise of MIR, it has become more significantly more valuable to stake mAssets than it is to trade them. As such, the Terra price has deviated significantly from the Oracle price. Some assets, like mMSFT have prices that are 1.25x higher than the Oracle price.
  • The spread between the Terra price and the Oracle price harms the long-term viability of the Mirror platform. The goal of Mirror shouldn’t be to create a secondary market of equities with their own prices; rather, the goal of Mirror should be to have prices that actually mirror their real-world securities.
  • This proposal suggests reducing lower bound of minimum collateral ratio (MCR) to 105% to cap the Terra price to 105% of the Oracle price

Description
By reducing the MCR to 105%, we create an upper bound of divergence between Oracle & Terra prices to 5%. This is achieved by the following process:

  1. Minter opens up position with collateral 105% * Oracle price (which is less than Terra price)
  2. Minter sells position in the market for Terra price
  3. Minter foregoes collateral and never closes the minted position

The 105% MCR was selected to simply keep the price bounding relatively tight, but theoretically, we could change this ratio to be higher if needed (e.g., 110%).

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I fear this would make the short squeezes worse and be bad for minters.

For example, if the terraswap price is up 4% compared to peg, then the minters would have to buy more stock in order to not get liquidated, driving the price up and removing supply.

Instead, what about something like 1) removing minting fees or 2) incentivizing minting with MIR?

Minting is basically shorting right now, and shorting is REALLY not popular these days.

5 Likes

Thanks for reading, pseudopete!

If we lower the MCR, then you can simply forego your collateral. You just mint something, sell it, and then never close the CDP (and just “default” on your CDP).

This will make it so that it’s completely risk free profit if the Terra price exceeds 110% of the Oracle price. Example:

If the oracle price of AAPL were $100, today, you would need $200 of collateral to mint one share of mAAPL. If you lower the collateral ratio to 105% of the oracle price, then what you could do is mint for $105. If the Terra price were, say 115% of oracle price ($115), then you could turn around, sell it for $115, pocket $10 in profit. You would simply never close the minted position. This change would create immense selling pressure and would drive the Terra price down to $110 because it’s basically free money to mint assets

2 Likes

Let’s say that the spread is a problem now. I have a different view on how the system could absorb it.
A bit of history:
I couldn’t imagine:

  1. that the process of adding, once whitelisted, N masset was still taking 2 weeks (at best).
  2. that MIR would have shooted up 400% making the LP positions so attractive

I am happy for the point 2 (and of the big liquidity which has been added in the system as a consequence). We could just proceed differently in the addition of assets.

Scenario (happened): There were lot of assets ready to be added (see forum post from do): we went for 5. The rest is sleeping and it will take 2 weeks to bring them into the system. Actually I was very happy for the choice: MIR was 1.2-1.5 USD and lp benefits looked at risk …

My proposal: once we agree that we cannot predict the MIR volatility and we cannot reduce the number of assets once added, let’s start to create a pool of assets ready to be added if lp yeld becomes to high.
In our happened scenario: register the parameters for all (if approved: we have a big backlog). Then there will be a technical week to test the oracles setting. At that point not all the assets need to be add in one shot. We assess the system at that moment and increase gradually or abruptly the number of assets (pools) depending from lp yeld, spreads and all the parameters which are eventually concerning us at that moment.

I would always keep a ‘pool’ of 10-20 assets whitelisted and registered ready to be activated in this first year. We need just to communicate properly the activation date.

I believe that this approach together with better peg for UST (handled terra side) should take care of the spread (will not disappear but will be very reasonable) without tweaking the protocol parameters or putting at risk the liquidity in the system.

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The proposal makes sense in a mature system. Now i am a bit scared.
Case 1. If UST loose the PEG in a serious way. can it harm the system? I think no but we should think about it too.
Case 2. Can the system (mirror itself) become insolvent or seriously hurted if there is a spike in prices of 20-30% and the average collateralization is 110%?

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If there are enough arbitragers who liquidate positions that are undercollateralized, then there isn’t any risk. Once oracle prices get high enough without liquidation, however, the system will break. That said, given free money and large auction discounts, this shouldn’t be an issue.

with the numbers you propose the system would be vulnerable to a loss of peg downwards. Think about it. The current problem is that there is too much liquidity flowing in in one shot: it is a great boot of the system. To me the proposal of creating a pool of assets ready to be added for such cases would be enough to at least mitigate the spreads without any risk for the system.

I agree with blackbird. More liquidity, through added assets, brings down the APY and ultimately the spreads.

The current spread is a result of high APYs

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If there is free money to be made why not have the Terra pools autonomously do this whenever they see their spot price warrants it? Then the profit can be net by the pool and used as the pool reward.

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Here’s an idea nabbed from DEUS.

What if similar to Nexus Mutual insurance pool, UST were contributed to a bonding curve collateralization pool for minting synthetics?

I haven’t had time to think through this much, but I wonder if pool minting has been considered.

I guess we had similar thoughts around the same time. Aayush however has suggested the premiums are due to UST premium: Telegram: Contact @mirror_protocol

I guess that would account for about 3-4% difference given current UST/USD[CT] prices. But I’ve seen way over 10% differences. Maybe even 25%.

Because the MCR for minting is 200%. If we lowered the MCR to 105%, there would not be spreads as large as we are seeing… Example:

If the oracle price of AAPL were $100, today, you would need $200 of collateral to mint one share of mAAPL. If you lower the collateral ratio to 105% of the oracle price, then what you could do is mint for $105. If the Terra price were, say 115% of oracle price ($115), then you could turn around, sell it for $115, pocket $10 in profit. You would simply never close the minted position. This change would create immense selling pressure and would drive the Terra price down to $110 because it’s basically free money to mint assets

Indeed. Thus the maximumspread is now between about 100-150% (or slightly higher due to costs).

Lowering the MCR probably decreases the maximumspread.

However, lowering the APY would do the trick as well.

ok let’s see –

so what if the price of AAPL goes up to $106 in a few days, then you would be liquidated – but maybe this is still be fine from the minter’s perspective? This would send less liquidation fees to the protocol (which goes to MIR holders), which may be bad from a risk management perspective.

also what about burning? Burning is important when the terraswap price is below the oracle price, because it decreases supply, bringing the terraswap price back up to oracle price. But if most people who minted got liquidated (because they minted at 105% ratio), who is going to burn?

– These are questions, not answers!

Why less liquidation fees? I believe there are fees at auction time…

People will burn if they want their collateral back. If the price is already above the MCR, then an arbitrager will liquidate the CDP at a discount.

If the Terra price is above the collateral, there’s no need to burn.

Love the idea. This would also result in more minting fees collected for MIR, which would increase staking APR and thus MIR price, which increases LP APR, driving up spreads, and so on. I think it would really work well. It has my vote

^^^^ GSOH :slight_smile: :laughing:

Collat requirement should never be below 125% IMHO

Problem
While I do think we could change the C-ratio I don’t think it would make a big difference. The problem right now is the risk that minters take on. This doesn’t change when they are able to deploy more capital because of lower C-ratio. The current situation is this:

To drive the prices of mAssets back to peg minters need to sell their minted mAssets and hope that more people do this and eventually drive the price down together. Everyone needs to then buy back their mAssets to close the CDP. So in theory the extra supply = the extra demand some time later.

However, for this arb to be profitable the minter currently needs to make at least 1.5% minting fees + 2 times 0.3% trading fees + current UST premium % if the capital needs to come from outside the ecosystem. So minters need to a clear 2.1%+ to break even. This is completely unbalanced and super risky.

Solution
I propose a solution along the lines of:
When the mAsset trades at a premium, new mAssets can be minted with a 1.5% discount. When there is no longer a premium there is no discount. This ensures that there are still CDP fees being rewarded to stakers and doesn’t mess with the current tokenomics. This would give minters that specifically try to keep the peg and don’t care about providing liquidity at least a little more incentive to take the risk.