Risk of high premiums vs sufficient collateralization ratio

I know premiums have been a big issue recently and a lot of discussion about how to improve them.

I know we’ve considered the idea of changing collateralization ratios to improve liquidity and create selling pressure to match the buying demand that is driving premiums up.

The main counter-argument to lowered ratios is ensuring there is sufficient collateral for liquidations if the assets spike and people become undercollateralized. This is a valid concern, but the thought crossed my mind that the risk of having extremely high premiums is not insignificant.

Consider assets that are trading at 20%+ premium. As these continue to rise, assuming the underlying asset oracle price jump because of a sudden bull market. The assets that have lower liquidity have the potential to collapse. These extremely high premiums give little room for the collateralization ratio to absorb the impact of the increased buying pressure from low liquidity (not the mention the disservice to users who are minting this assets by buying them at 20%+ premiums).

I propose that the relative importance of collateralization ratio should be balanced by this significant risk of low liquidity + high premiums + potential bull market which could potentially collapse the entire mirror protocol. I think reducing some of the incentives for buying this assets and/or significantly increase the incentives to mint/sell. I know there is a proposal to increase shorting incentives, but I’m concerned we need a more aggressive approach to bring down premiums in line with market prices.

Any thoughts?


My thoughts:
As discussed in another topic, there are following groups of protocol users:

  1. net long traders
  2. net short traders
  3. short loopers
    4a) delta neutral on mirror
    4b) delta neutral arbitragers - short on mirr, long on tradfi broker

Delta neutral 3a players do not have impact on premium as they mint stock and they buy it.

High premium = more net long players, lack of shorters.
To lower the premium, the protocol must incentivize short offer or supress long demand (which is not likely, we want high volume). Shorters generally take greater risk than long players - shorters risk collateral liquidation, they can not sit and hold if it goes wrong, indefinite loss risk and they pay mint fee. The high premiums problem occurs probably when mAssets are in the bear market - if the mAsset is already oversold there are not much players wanting risk spike up.

So there are the following options:

  1. greater rewards for short side/ lower rewards for long side - already agreed in poll, waiting for implementation - I think this is the best option, but it may not be enough.

  2. lower colateral ratio - yes, it works, however as it was tested on mSPY and mKO, too low colateral encourages short loopers and premium can go below zero. Lower colateral ratio = greater risk of liquidation failure if the stock spikes up. You are right, there is a risk of protocol failure. The ratio need not to be lowered to 130%, may be 140% or 145% would help a little with a smaller risk?

  3. lower mint fee - 1.5% mint fee may discourage net shorters if they want to open short term position. Generally, all shorters must count with this fee and compare it with shorm farming rewards. Lowering mint fee would ecourage short term net sales, but it would lower income of Mir token holders. So it is not prefered way. Unless there would be a way how to collect some fee also from the long side?

  4. shorter locking period - if the UST from short are released earlier, you can reinvest them earlier and you are compensating the mint fee earlier. Actually it would increase rewards for shorting, but it may encourage more short loopers. I am not sure if short loopers are prefered group of shorters as they are shorting on leverage and they may be mass liquidated. It may be also risky.

  5. allow more assets as collateral - it could also encourage minting if people could use Luna, bEth, Anc, etc. as Collateral. But, it is not sure if these users would not prefer delta neutral strategies with no impact on premiums. However, it may help, risk is small, but is it worth of developing costs?

  6. improve liquidation process - the bugs in liquidation process must be removed, otherwise shorters will be affraid to mint enogh mStock. Likely it would be nice to have liquidation process redesigned. Yes, Yes, please lets concentrate on liquidation process improvement as priority.

  7. open derivates on mAssets like futures and options - if the derivates could be closed by delivering mAsset it could allow arbitrages on price - a lot of workt, big development cost - probably it is not on the table

  8. invent more strategies in cooperation with other protocols and networks - not sure if this initiave should come from Mirr comunity, may be Mars and Edge will come with some initiatives

I can not see more options how to handle high premiums.

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Did you check what can be used as collateral? (; You could find there: UST, aUST, LUNA, LunaX and ALL mAssets that are on Mirror. ANC and MIR were once available as collateral, but this was removed via a poll in late 2021.

EDIT: I mixed bETH (not available) with mETH (available)

Overall, I think this a great summary of ideas. I actually think attacking the minting fee might be helpful. Perhaps charging some kind of fee for the long side, and lowering the minting fee? Maybe dividing evenly between both sides. The incentives for minting need to rebalanced because without minters the whole thing goes down.

My fault, i have never used anything else than aUst as collateral. However, you can think about pLuna, nLuna etc.

have you read this?

I saw that article for sure it seems like an interesting solution. Unfortunately my mathematical expertise is quite limited so I can’t interpret the matrices :confused:. But I like the idea of aggregating multiple assets to and addressing it as one issue instead of multiple, variable issues where we have to tweak parameters constantly with governance votes. I think it would be better solved by the “invisible hand” of the market, and an AMM seems like a cool solution, but I just don’t have the technical expertise to understand the details and mechanics of how it would work. Assuming it works and I understand its limitations and goals, I’d be all for it!