I think we are all paying attention to the mAsset premium.
After observing the economy of the Mirror in recent weeks, I have come to one conclusion.
Think about it. All mAssets are minted by minter by creating CDP. In order to close the CDP, one must eventually buy a mAsset, which means that the first seller will always be Minter and also final buyer is.
The CDP does not generate any profit by itself. On the other hand, the holder of a mAsset can make a profit by staking it.
And importantly, even if the Oracle Price falls below the price of the mAsset, the holder of the mAsset does not have to sell the mAsset. Acutually, there is no need to sell at a lower price because the premium will not cause any loss to the holder and they know that Minter will eventually buy it back to close the CDP. If the holder doesn’t sell, the only factor driving the price down is minter’s selling, but in order to sell mAsset, they need to mint another, and eventually they will have to buy back. Who in the world would mint in that situation? It will only cost you and benefit other minter
The exception to this is when the premium exceeds the minimum collateralization rate , which is 150%. In this case, you can make a profit by Minting and selling the mAsset in the market and intentionally liquidating the CDP.
In other words, a equilibrium can be created by adopting a strategy where no holder will sell until the MCR limit is exceeded. In this situation, as mentioned before, the holder side will be rewarded for staking, but the Minter side will not be rewarded in any way. When this equilibrium occurs, the supply of mAssets will hit a ceiling because no one will Mint, and the Mirror Protocol will fade away.
And that is where the Mirror Protocol is actually headed right now.
I know there are several proposals to prevent this.
- lowering the MCR
- reward minting with MIRs
1 will certainly reduce the premium, but it will eventually lead to equilibrium. Lowering the collateral ratio is also undesirable as it makes the vulnerable to default risk in case of sudden market changes.
2 is the directly way to reward Minter for absorbing the premium. IMO it is essential to incentivize minters to peg price, but I don’t think it is sustainable because MIR are not inexhaustible.
So I propose another way.
Rewarding the Minter directly, using UST of the LP pool.
By removing USTs from the LP pool, we can directly control the premium and the supply of rewards is sustainable.
Thank you for reading, any comment?