[Proposal] Rewarding mAsset minters with $MIR

I propose rewarding mAsset minters up to 300% APR.

Current incentive structure disproportionally rewards LP providers over mAsset minters. While LP providers may suffer from impermanent loss, mAsset minters are exposing themselves to liquidation risk and are required to actively monitor their collateralization ratio.

Current broken incentive structure is forcing minters to add their minted mAssets to liquidity pools to get $MIR rewards, which subjects them to impermanent loss and further exacerbates their collateral maintenance.

I believe the solution would be to reward minters with APR comparable or ideally higher than those of LP providers. I believe 200-300% APR is ideal.

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While I agree adding some incentives for minting will be necessary, giving flat MIR rewards at an 200-300% APR for only minting is a poorly formed argument.

In this case, a minter essentially takes very little risk for very high rewards. All I would have to do is to monitor my UST in my CDP. I wouldn’t even need to provide the minted assets to any liquidity pools. Essentially there is no price exposure risk, IL, etc. as I take no positions by simply minting and holding.

Now perhaps increasing rewards for mint+pool/stake is something that can be considered.

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I suggest you wait for Anchor release and see how Mirror collateral can interact with Anchor - i’m certain that this would address your immediate concern

Anyways, i’ll keep repeating this, minters best incentive is to take arb profits on asset’s volatility - to increase the incentive, let’s make sure we have more volatile assets available on the protocol.

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Agree with @Sihyeok that just minting is not an activity to give rewards for. While it is true that collateral is being locked, and user has a risk of liquidation, I don’t think they are as big a contribution as providing liquidity to pools.

I think it was reasonable to reward LP Stakers , because of their “contribution” to making the market larger, and pool spread more stable.

Without minters minting mAssets, mAssets market cap and liquidity will be super low, and consequently liquidity pools liquidity and volume will be low as well.


In fact, minters are forced to open a short position while minting a new mAssets. This risk alone deserves some MIR rewards imo.

So I think minters deserve some extend of rewards. Perhaps we should have a poll of what’s the APR should look like? 10% 30% 60% 90% 120%?

Yes

No, unless you can read the future and predict that none of the current (and future) mAssets listed on Mirror will ever see a price decline, opening a CDP and taking a short position on the price of the minted asset, is a calculated risk - not that different from being long by buying the mAsset in the pool.

I think your observation that minting should be encouraged is valid, but I disagree on the method you propose to remedy this: we should not need to modify the inflation schedule or divert community funds.

I think you could participate into this discussion for example

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the minting use case is not just mint and add to a pool forever. There could be faster arbitrages. More: the market is not in a bull mode forever. Consider that in a bear scenario a minter can: mint, add to a pool, get rewards and have in the pool MORE massets than he added, closing the position while keeping some massets. There are and will be so many use cases for the massets that I don’t see reason to add rewards: as soon as mirror will handle 3-400 massets we will assess differently the roles in the platform.

Not sure who wrote this, but the wording here is ambiguous.

A short position is not formed if one simply mints and holds the asset. A small but important distinction to make.

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@Sihyeok what do you think of Mirror governance incentives are broken - #36 by dokwon

In addition to spending a lot of time analyzing various projects’ economics, I’ve been with Mirror since day 1, and have thought about the implications of having minting rewards. My conclusion is that it’s not a good idea.

First, let me start with my claim that there is nothing wrong with the current minting incentive structure, and that the core issue is with a lack of liquidity. With the exception of off-market hours, prices have held between -1.0% and +2% extremely well, mostly to the upside, and even when the LP APR dropped to low levels. Even during off-market hours, this range has been well-respected between the periods of enormous growth (mid-Dec 2020 until the weekend before the Harvest collaboration). In addition, whenever prices go above peg by a certain % during market hours, market-making bots mint more mAssets to sell it down to peg. They also buy severely-underpriced assets to close positions. This tells us that demand for mAssets is being appropriately met by supply from minting. The current lack of liquidity is due to Mirror still being in an early growth phase, and not because people do not want to mint.

Now, let’s see what happens if minting incentives were introduced. People would mint mAssets for the sake of minting, and compound it with adding liquidity. This can result in a nasty situation that we would like to avoid: Where mAssets are consistently priced lower than the oracle price, due to UST that would have been used to buy mAssets being locked up in a mint position. Compared to being priced consistently higher, where mAssets would be limited to (currently) 150% of oracle price due to basic economic factors, the lower bound on an mAsset’s worth is $0.00, with no algorithmic factors to bring it back to peg. It would also result in a complete loss of trust in Mirror and kill the project, much like what is currently happening with ESD and DSD. Rewarding minting with additional yield has a high potential of bringing about this scenario.

Furthermore, rewarding minting with MIR will actually decrease liquidity. Think about it this way: The TVL will stay the same, while the amount of UST will be locked will increase. Giving minting rewards does not result in new money coming into the system, just that existing money gets shuffled around. The equilibrium will be reached when (minting rewards + LP rewards) = (current LP rewards).

To that end, I would like to suggest an alternative solution to increase liquidity; If someone opens a mint position using UST, they should be allowed to do so at 120% collateral. Everything else stays at 150%. This would massively free up UST locked in mint positions, which would then be used to add liquidity to the various pools.

Side note: I wish people would bring up gov discussions on Discord before coming to the forums, very few people read gov forums and you’d get a larger audience, more viewpoints, and immediate, direct discussion there. I wouldn’t be here if it weren’t for Aayush nudging me here.

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Very sensible points here, I had not seen the issue under this angle before so thanks for that.

In light of @dokwon proposal (Mirror governance incentives are broken - #36 by dokwon) , what do you think if the minting rewards were only enabled whenever spot price > oracle price ?

That would actually prevent the perverse scenario of an asset quoting under its oracle price and still stimulate the creation of inventory to accompany the growth of Mirror overall.

Also, one thing to think about is how we ensure these rewards are not going to be eaten away by arbitrage bots ?

That’s an interesting possibility, but it partially depends on the source of rewards. Will it come from LP rewards, or will it be a separate pool? I can see it adding buying pressure when mAsset prices are below peg, but I’m not sure it’s the best solution. Rewards will probably either end up in equilibrium with just LPing, or it ends up just adding an obscure layer of complication that rewards people who can figure out the economics, game theory, and automation for a few weeks before becoming inaccessible to most people.

It’s something that we might think about in the future, but ultimately I believe that there’s no need to add any minting rewards at the present moment. Add more users and the minting follows naturally.

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Another point, most people probably don’t have enough assets to have major issues with liquidity. The other lesser used case for minting, besides to sell into an LP, is for whales to self-provision liquidity without interacting with the market. I know there’s a few of them around.

Both cases end up with an overall increase in liquidity in pools, more TVL locked, and result in supply of minted mAssets matching supply, so there’s nothing wrong here.

Very good arguments from my point of view. I would add also another argument: if the spot price is much higher than oracle it means that a big risk is priced in from the minters. Subsidizing it with MIR means that mirror takes in that risk: is it the role of the protocol? I don’t think so. It is the role of third party defi app growing around and using massets to eventually transfer risk based on users demand.
I would also vote no against this proposals: I think was very good to raise the question in the forum and I will follow the discussion.

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I don’t understand the example (use case) of the whales. Can you elaborate?

As it would cost too much to buy a significant amount of mAssets from the market to farm with due to slippage, and because it would make it harder to exit Mirror, whales prefer to, instead of having 50% UST in mAssets and 50% UST to LP, do maybe 65% in a mint position and 35% to LP. This lets them farm MIR with more capital and without moving the market, at the cost of not getting as much rewards as they would have by just buying assets from the market.

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I agree with Seb on that one, I think we should hold off with any future community pool distribution until anchor launches and protocol is at least 3 - 6 months old with deeper liquidity pools. I also thought initially to add 100% APY to governance but decided to hold off with proposal as things are really changing rapidly with mirror. I think we have 10x mAssets trading coming, that will also change dynamics of minting / staking so my take on it no rush and let the market show us the way at least for another couple of months

The benefit of minting is getting 1/2-2/3 the value of your collateral right off the bat. The liquidation risk is real, and personally would rather put up 200% collateral than worry about falling below threshold. But to get MIR rewards, one can always stake their MIR. It will not be the 200-300% APR of the LP tokens, but that high rate per the founders is an extra boost to attract liquidity providers during the first year of launch, since their pools are essential to trading.

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I agree with your points. Ultimately if you want to think about this from a high level, the minting activity comes as a consequence of trading above the peg and engaging in arbitrage profits. So essentially it’s the higher demand of mAssets that is translating to minter profits. The higher demand of mAssets in turn comes from MIR rewards.

Diagrammatically, incentive structure is as follows:

MIR rewards (and other factors) —> Higher demand for mAssets —-> mAsset trades above peg/spot price (premium) —-> Arbitrage opportunity arises —-> Market making bots mint mAssets to make arbitrage profits

After 4 years when MIR rewards are low or are no longer available,

The structure will be the same except that other factors will take a center stage to create the premium. By that time Mirror could very well be be on multiple (3-4 digit) platforms and multiple (2-3 digit) blockchains

Some examples of other factors leading to the premium could be:

  1. Users willing to pay a premium to trade assets when markets are closed capturing after-market opportunities (premium to access markets during down-times)

  2. No paperwork/No requirement of KYC and non custody holding

  3. Access to US tech stocks at low fees (Investors in countries like China and India where governments want to discourage capital plight currently have to pay a huge premium along with a lot of paperwork for accessing overseas markets and ADR instruments- we are not even discussing access to a common man)

The restoration to spot/peg by minters and arising of arbitrage opportunities when price is above the peg is safer than introducing risk for price to go below the peg (as that can cause a serious damage to investor confidence)

The restoration to peg (when prices are at a premium) involves a game theory angle but as long as there is convergence of incentives for all all actors that are involved, the system should work efficiently.

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if the Peg is the problem: for crypto massets an idea is integrating in tripools in curve.finance (just an example). The arbitrageurs ‘work’ among the various component of the pool. A temporary subside can be done for example for mbtc (in curve) to test how it works. I can imagine that there will be a flow between mirror pools and the 3rd party ones buying low and selling high (when gas allows it).
If the problem is risk for minters causing too less massets minted. The more the 3rd party offer grows the easier will be get a full hedging and build good strategies around minting. mAssets can become a vehicle for third parties to ensure to customers returns of 5-8% on stable coins for example. In that case I can tell that minting and hedging at big profit made on volume will be the last of the problems. The real worry will be terra stability, mirror governance well working, security well handled and so on (even team stability and competence).
My suggestion is to let mirror mature still a bit before considering minters rewards as now there are a lot of anomalies and there could be ways to mint with higher profit than buying at premium in a pool and staking there.

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