[Proposal] Reduce minting fee & reduce minimum collateral ratio

Current situation:

  1. There is a protocol fee of 1.5% for collateral withdrawal (when a user withdraws collateral either to manage position’s collateral ratio or to close the position). Mint - mirror
  2. There is a minimum collateral ratio of 150%, below which a user’s position can be liquidated.
    Mirrored Assets (mAssets) - mirror

Objective being addressed here:

  1. Increase minting of mAssets (adoption).
  2. Increase capital efficiency for minters of mAssets.
  3. Reduce variation of mAsset prices from the oracle prices.

Right now, there is insufficient minting of mAssets (indicated by declining ratio of value of minted mAssets against liquidity). There is significant variation of mAsset prices from the oracle prices.

By reducing the protocol fee to 0% for 6 months, there can be an accelerated increase in the minting of mAssets by users who would become active arbitrageurs to reduce the spread of mAsset prices from the oracle prices. An alternative is to reduce the protocol fee to 0.1% (not 0%).

By reducing the minimum collateral ratio to 110%, users can elect to have a broader range of collateral ratios (between 110% to 200%, compared to the current range of 150-200%). This increases capital efficiency for minters of mAssets. Note that I think the default should remain at 200%.

Proposal:

  1. Reduce minting fee to 0% for next 6 months. Note: An alternative is 0.1% protocol fee for next 6 months.
  2. Reduce minimum collateral ratio to 110%. Note: I think the default should remain at 200%.

Additional proposal inspired from @Sebnondzee @Sihyeok 's comments:
3. Let MIR-UST stakers participate in mirror governance. This dampens the effects of reduction in protocol fees.

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Please be aware that CDP redemption fee is the only source for rewards distributed to stakers of MIR in governance. You would basically remove any incentive for anyone to participate in Mirror governance

I do not have any opinion on point 2 , except on how to pass this : you will need to submit a “whitelist parameters” proposal for each of the mAssets you intend to change the CRatio

Below are a few questions that I had about what you suggested in no particular order:

  • Is there a rigorous argument for 110% over say a different percentage?
  • Have you considered the cases where 110% is too low of a ratio to incentivize third-party liquidators to close CDPs in the event of sudden price/vol spikes between off hours and market hours?
  • Reducing CDP fees reduces governance rewards. Is there a proposed solution for this?
  • Do you have some sort of estimation of the increase of minting actions that will happen when the ratio is dropped from 150 to 110?
  • Which of these assets would the reduction in CDP ratio be enacted? There are upcoming assets with 200 and 300% ratios as well.

Thanks @Sebnondzee for your feedback.

My proposal modification here would be for mirror governance to include all MIR-UST stakers. Not just MIR stakers.

My secondary proposal modification here would be to perhaps reduce the protocol fee to 0.1% (instead of 0%). This provides some nominal yield.

Thanks @Sihyeok for the feedback.

  1. No, I think even 120% (as suggested elsewhere) or 125% works.

  2. Good point. I think the system should still default to 200% (current setting). However, give flexibility to savvier, risk-aware users. Users who elect to select a lower number need to manage their risks accordingly. This is similar to users of Aave who set a health factor of more than 3.0 during the times they are sleeping - but adjusting their health factor to more than 1.3 during the times that they are active & monitoring the market.

  3. As per above, I think the solution is 2-fold:
    3.a. Allow MIR-UST stakers to vote.
    3.b. Perhaps not reduce the protocol fee to 0% but 0.1% (nominal yield).

  4. Right now, the system has a default of 200% (which should stay), minimum collateralisation ratio of 150%. The actual collateral ratio is 199%. So let us assume that people prefer a buffer of 49% (~50%) and don’t change that setting.

Then at 110% + 50% buffer, that leaves 40% of added liquidity that can be used for minting.

Value of minted assets is roughly $62 mil.

This is roughly backed by $124 mil in collateral (200% collateralisation ratio).
If we move to 110% + 50% buffer added by the market, this means about $25 mil in capital can be used to mint additional mAssets (about $15m more in mAssets if we use the same 110% + 50% buffer, 25/1.6). 25% increase in minted mAssets if we move to 110%.

If we move to 125% + 50% buffer added by the market, this means about $15 mil in capital can be used to mint additional mAssets (about $9m more in mAssets if we use the same 125% + 50% buffer, 15/1.75). 14% increase in minted mAssets if we move to 125%.

  1. As a start, I think it should be applied across the board i.e. the system still defaults to 200%. Then when people figure out how to estimate the impact of volatility, they can adjust the minimum collateralisation ratio further. In theory, low volatility assets means lower collateralisation ratio is needed. Savvy users should be able to figure it out for themselves, and as the system becomes more sophisticated, I would expect users to have actual collateralisation ratios that vary across mAssets.
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Maybe split up the proposals and go forward with a decrease in the collateralisation ratio?

We could use some more arbitrage. Prices are up 10%+ above their pegs.

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We need arbitrage to attract new users to buy mAssets. Who wants to buy a synthetic asset at 10% over the actual asset value?

I would agree with reducing the fee to close a CDP as well as decreasing the collateralization ratio. Increased trade volumes should make up for the decreased fee when it comes to reward distribution.

Agree with 1. Currently there’s no incentive to arbitrage at all. 0%/0.1% works well

  1. I think this should be synthetics dependent instead of a flat collateral ratio reduction.
    E.g. mVIXY should not have the same collateral ratio as mIAU.

Default collateral ratio at 160-200% sounds good as well.

While terra network and band protocol works well, we need to look at previous volatility of underlying assets to determine what is a good minimum collateral ratio. (e.g. if an underlying has the history to gap up more than 10% over the weekend, it should have minimum collateral ratio of ~120% as 110% just doesn’t work)

MIR-UST stakers definitely should be allowed to vote as well.

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the spread has many explanations. It represent the amount of risk a minter accepts to take considering all the rewards in place. It will get thinner with third parties defi arbitraging and with the system getting mature.
I dont agree with the statement that nobody wants to pay more than oracle price… the answer is: the spread is there. You don’t sell at oracle price (only mint) so, if you factor in the premium staking in the pool or you want to trade at this stage of the project the spread is just a component of the strategy success.
We don’t need to change mirror to avoid the spread: it is enough to have, for example, other synths ported in here and arbitrage pools. Example: renBtc is backed by BTC 1-1. integrating a new shuttle, decentralized and pluggable in other chains as well in cexs, we can have 3-4 flavours of btc, and this will bring a stronger peg in the system (we need just to be careful to understand which synthetic btc are better reflecting the real btc price: again, this is the job of a user buiding his strategies: you can also bet on an asset loosing the PEG…)

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the spread exists, because the reward for liquidity mining outweighs the spread.

Does this work for yield farmers? it certainly does. But this does not make mirror usable for normal retail users at all. NO ONE will use mirror to replace their traditional broker because of the spread.

Porting other synthetic asset to minimise the spread does not solve the root cause of the spread. (i.e. benefits of market buying and staking outweighs benefit of minting and staking)

in this phase of system life it is normal to prioritize to bring in liquidity. It is working perfectly. Farming plays a role. My impression is that a lot of users wants the system to act like they desire (and their trades are setup) and change the rules accordingly. I say: the rules are very very good. Plan your strategy accordingly, while the system matures. About retail traders: I believe they are using the system even with the spreads (volumes are quite high, and my biggest concern would be bid ask spread not oracle spread): they will investigate and understand the reason playing with it. with x10 more liquidity or x100 more in the system the behavior will change a lot. Honestly: I don’t know how, and nobody does. We have to see it in practise. BTW: minters can make much more money than all the others actors in the system: they will not write how …

I agree. The rewards for staking mAss are so big, it pays to overpay.

Waiting for the problem to solve itself is not a good syrategy. When the trust in the peg disappears, it wont Come back.

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the trust in peg is there! When you trade a stock in nyse and the same stock in a less liquid market do you believe the price and bid ask spread are the same? The stock is the same. The oracle is weighting this and is not the absolute truth. I suggest to read about the LTCM bet against spreads to see a real case (wonderful story: the book is “When Genius Failed: The Rise and Fall of Long-Term Capital Management”).
Mirror has to define or probably has already defined a strategy and it is clear to me that the current setup will give a great premium to mir accumulation. This is key for liquidity. Having 1000 pools (massets) with mir at 100 will be still very attractive for liquidity providers (and will keep a “spread”). The current spread is the ‘price’ to pay and is the fair division of risk between actors.
I agree that if we see a problem is wrong to wait that it fixes itself, but sometime there are dynamic situations and the ‘problem’ is a temporary anomaly. My view is that the platform has to mature.
Of course we need to brainstorm and think about scenarios. If the tendency will be that the setup, long term, is so that minters will not risk to lower a 10% spread, something will need to be done. First part of the title of the proposal for example (but it is questionable too). I would run away screaming from any proposal that reduce the collateral ratio now though …

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We do have a problem with the Peg at the moment prices have diverged very significantly. COuld this requirement to lower the collat ratio help with liquidity crisis ?

The simple fact is, holding the assets gives you a 0.6-1% return, per day. It makes sense to overpay, you earn it back in 1-2 weeks.

I mAss has an oracle price of 100 but trades for 115, you can earn back the premium in 2-3 weeks and make 0.6-1% per day after that. There is 1 risk, of the price of the mAsset decreasing.

Alternatively, you can mint assets and sell them, netting a straight 115-100= 15%, minus 1.5% fee and some trading costs, or a return of about 13% immediately. Or so it seems, you have to lock up about 200% of your inlay for a safe colleteralisation-margin. The real return is thus about 7%, and no returns after that.

However, if the gap with the peg continues to widen, it becomes more and more expensive to close your position. There is thus a double risk; 1. of the asset increasing in price en 2. of the peg loosening.

I for one would love to mint, I can accept the price/market risk, but not the added risk of a further widening of the peg. At least, no for a meagre 7% return.

Lowering the collateralization and the fee could help, or alternatively to pay for holding a short-positon (minting and selling), just as we pay for buying and holding.

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The current situation is untenable and I would support

  1. reduce MCR=105%: this will guarantee that the oracle vs terra spread will rarely exceed 5%.
  2. increase default MCR=200%: this will reduce the commonly cited risk in this thread of third-party liquidators preying on minters’ CDPs
  3. rewarding minters: minters perform a critical function similar to LPs. The reward should at least proxy the opportunity cost in shorting any asset with forced liquidations risk in the form of foregone interests/APY.

If we continue with MCR=150%, we could find that

  • existing minters unwilling to “cut-loss” since they may have sold cheaper and prices remain stubbornly higher than oracle; and
  • new minters unwilling to step in even though the the Oracle vs mAsset spread is higher and hence the risk is theoretically lower. Note I say the risk is theoretically lower because in reality, the minter is unable to cash in the gains until prices actually come down.

To illustrate this further, assume that any market participant has two options
Option A] fund LP: high APY from LP vs minting which could result in a few scenarios
Option B] fund mAssets: actual returns are contingent on 3 possible outcomes

  • Best Case: prices fall and minter cash in
  • Worst Case: oracle prices reverse trend and rise before those minters get a chance to cash in (quite real especially under current market conditions)
  • Base Case: assuming nothing much happens and spread remains largely unchanged, there is still an opportunity cost from the locked funds while waiting for prices to actually fall.

Most market participants will not be keen on Option B since the risk is very real that insufficient number of minters will come on board quickly enough (this is required in order to cash in the arbitrage).

The risk/reward imbalance will be significantly improved via both proposals by OP and also a third to add a reward to minters.

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I came over to mirror because I wanted to get exposure to “less volatile” stock ETFs while still getting some nice LP income and staking income. There are not a lot of good options out there on crypto to gain exposure to stocks. Mirror sounded like a great platform to try.

I currently have over $200k worth of assets on Mirror. Although its cool that my assets went up dramatically in price, they are now way out of line with what is just a premium for minters, stakers, etc.

mQQQ is currently 11.8% premium over QQQ. If that 11.8% was sort of consistent over time, and over all mAssets, then it might make some sense. But it isn’t, and just turns this into another volatile crypto asset that barely makes any sense. So I thought I will look into the minting process and see if I can make some small profits and help the protocol by bringing the price in line with the oracle. From what I can see, there is no way to make money off of doing this, unless other traders and minters move the price down after I do. Then I would buy back to exit out of my position, and that raises the price back up and does not really help anything.

The economics of the system should encourage minters to make money if the AMM price is a certain % over the oracle price. Right now it still requires that the minter want to take an actual short position on the asset rather than an arbitrage position.

I like the platform a lot so far, and have made some good money, but honestly this all makes me worry, and I have started to exit my positions and move money elsewhere until the pricing mechanisms are fixed.

Edit:
I think an issue is that (if I understand the system right), when I am holding mQQQ and currently staking rate is 300%, and a minter is able to add to the supply and lower the price of mQQQ, then that makes it cheaper for someone else to buy mQQQ and stake it to get that 300%. It is almost self defeating, because the staking rate just attracts more stakers into that pool as the price of the mAsset goes down.

One way to address that would be to have part of the staking rate tied to the premium that the mAsset trades over oracle. As the premium is higher, the staking rate should lower to help attract less people to stake that asset, and create some pressure for holders of that mAsset to sell and switch to a different mAsset LP/stake pool.

Maybe does not fix the problem entirely, but it does add better incentives to keep an asset in line with the oracle for stakers.

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I thought about it some more. As mentioned, it makes sense to overpay, as you get an additional reward next to your stock exposure.

This reward gets smaller as more liquidity is added to the platform, spreading the rewards over more assets, thus dexreasing the extra rewards per LP. This in turn should lower the spread.

High APY’s attract assets, so that is one way of solving the issue.

The other is helping more assets to the protocol by adding different stocks.

If we (myself included) dont make it into a problem, it is not an issue.

Tl dr; As long as there are high extra rewards, there will be a spread. More liquidity decreases rewards per LP, thus decreasing premium paid (spread).

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How about if minimum collateral requirement has a TIME aspect?

By my understanding having it > 100% is after all intended to add stability by reducing frequency of forced liquidations as mAsset price increases to the point where the CDP is upside down. But the shorter the time the less chance of that the CDP could be upside down and in need of liquidation. Theoretically if oracle price + fees < spot price and asset is liquidated immediately then there is no risk. Immediate liquidation is not possible, you’re always gonna compete with pool users (front runners even) who could drive the price down but it seems like if you have a 100% + a few percent minimum requirement rising to 150% (or whatever) at a steady rate (or using some other formula) e.g. 1 bp a second or 50 bp a minute then after about an hour or two you’re close to full requirement. Short term arbitrage is incentivized, long term minting only as a shorting option.

If you want to get fancy throw in some volatility coefficients to determine initial collateral. Eg. require 100% + 150% of 2 standard deviations of price volatility over the time frame being considered. Highly stable mAssets can be minted for short time with close to 100% collateral. Very volatile ones need higher initial collateral. But all tend to 150% or whatever was set for the mAsset over an hour or so.

the current premium exist because it ‘makes more sense’ to market buy and stake, instead of minting and stake.

This is not meaningful/valuable liquidity.

We need more mAssets in the pools, and not just be happy with total UST value of pool going up

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