Proposal to fix persistent mAsset premiums and unsustainable delta neutral farming

Under the current MIR rewards distribution structure, the most efficient way to accrue MIR rewards is through a delta neutral strategy of minting and selling an mAsset through the sLP, buying an equal amount of the sold mAsset effectively using the proceeds from the sale, pairing the mAsset with additional UST, and depositing the pair into the LP (“MIR delta neutral farming strategy”). The MIR delta neutral farming strategy is the most efficient at extracting MIR rewards because it allows a participant to capture the LP and sLP rewards on what effectively is the same mAssest while providing no real net mAsset liquidity since the mAsset which was minted via the sLP is repurchased by the same participant using the proceeds from the mAsset sale.

Stated differently, MIR rewards are the incentive for minting mAssets and providing liquidity but the current MIR rewards structure gives the most MIR rewards to MIR delta neutral farmers who provide the least mAsset liquidity to the system.

Given the CDP structure of mAssets, Minters are necessarily taking a short position in the mAsset and it is for this reason that they should be compensated. Participants who do not have a net short position in an mAsset should not be able to accrue more MIR rewards than participants who are net short.

To remedy this problem, there needs to be a way to prevent “sLP mAssets” from being deposited into the LP because “sLP mAssets” deposited into the LP effectively negate the short position/liquidity created via the sLP. Similarly, participants who buy an mAsset should not be permitted to deposit that mAsset into the LP and claim MIR rewards because that participant “took liquidity” by buying the mAsset in the first instance and their participation in the LP would not provide any net mAsset liquidity.

Proposal: Limit deposits to the LP to newly minted mAssets only.

Limiting deposits to the LP to newly minted mAssets (with corresponding UST) would ensure that LP participants are net liquidity providers. This would prevent MIR delta neutral farmers and mAsset buyers (liquidity takers) from depositing to the LP and accruing MIR rewards for which they have done nothing to earn such compensation.

Under the proposed structure, there would be two options to accrue MIR rewards:

(1) Minters who are willing to take a “naked short” position on an mAsset will mint through the sLP.

(2) LP Providers who do not want to take a “naked short” position but are willing to take on a smaller degree of short interest could participate in the LP by minting new mAssets and pairing the newly minted mAsset with an equal value of UST for deposit into the LP within a single transaction.

In both cases, the Minter and LP Provider have provided liquidity to the system and it is for that reason they should be compensated with MIR rewards.

It is important to note that even under the proposed structure, it is possible for a participant to be “delta neutral” by simply buying the same amount of mAsset as they have minted in the LP or sLP and holding the purchased mAsset in their wallet. However, under the proposed structure the participant who does this does not accrue additional MIR rewards for doing so.

The proposed structure is not intended to exclude participants who want to be delta neutral but rather just to ensure that delta neutral participants are not rewarded with more MIR rewards than a participant who is short only because for a given amount of capital, the participant who is short only will provide more liquidity to the platform than the participant who is delta neutral.

Indeed, the concept of being “delta neutral” is essential to the long term success of the MIR platform, however the way in which a participant achieves a delta neutral position should not be through purchase of the mAsset because this takes liquidity away from the platform, but rather from purchase of the real Asset in a traditional brokerage account.

Ideally, the platform would consist of three primary participant types: (1) Buyers who want price exposure to the mAsset, (2) Minters who open CDPs because they either want the short price exposure to the mAsset or are delta neutral to the mAsset through ownership of the real Asset in a traditional brokerage account, and (3) LP Providers who enable trading/exchange of an mAsset but do so without taking mAsset liquidity created by Minters by minting new mAssets for deposit to the LP.

Buyers do not accrue MIR rewards since they are liquidity takers. Minters and LP Providers would share the MIR rewards because they are providing the essential minting and liquidity services without which Mirror would not be able to function.

This could pair rather well with your proposal: Mirror Protocol’s AMM Problem — A Potential Solution | by EuphoricBadger | Oct, 2021 | Medium

This doesn’t logically work. You’d actually make it so ONLY Delta Neutral farmers can provide LPs:

Shorting” means you mint the mAsset and then SELL it – your short farm sells the minted asset to push the premium down. So you can’t LP anything because you don’t own an mAsset.

Borrowing” means you mint the mAsset but HOLD it – if you LP it from here then you’re delta neutral (since you owe the contract 1 mAsset but also hold 1 mAsset).

You are misunderstanding what I’m proposing.

The change would be that in order to deposit into the LP (long farm), you must mint the mAsset half of the pair simultaneously with the deposit into the LP.

So if you have $1500 you want to LP, would open a $1000 CDP which mints $500 of mAsset. The mAsset is then paired with the remaining $500 of UST and the UST+mAsset are deposited to the LP.

The interface for the long farm would essentially look like the short farm interface where you setup the CDP, but instead of “returned UST” at the bottom you would have the additional amount of UST required to complete the pair in the LP.

This forces LP (long farm) participants to be minters/liquidity providers.

The current problem with the LP is that people can buy a mAsset from the LP (taking mAsset liquidity) and then put that same mAsset back in the LP and claim MIR rewards without providing any net increase in mAsset liquidity because they didn’t mint anything.

I see what you mean on liquidity, that’s not a bad idea then. They end up delta neutral but they at least provide something then

Yes, I think it’s basically impossible to prevent someone from getting delta neutral if they really want because there will always be work arounds (i.e. using two wallets).

But at least with this change, people who want to delta neutral would be forced to hold the mAsset they buy to get to “flat” in their wallet and they could not put it into the LP to accrue those additional MIR rewards.

The change does not eliminate the delta neutral so much as it makes sure that delta neutral does not result in more MIR rewards than a single short farm position or a single long farm position of the same size.