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.