Staked LP Tokens as Collateral

I think we could dramatically improve liquidity on the protocol if we allowed staked LP tokens to be used as collateral when minting new synthetic assets. For example…

A LP provider that wants to supply liquidity on TSLA could come with 200 UST, mint 50 worth of TSLA, then supply that to TSLA liquidity with another 50 of UST, and this staked liquidity would be collateral against the TSLA minted. This allows market makers to be market neutral at the start and only incur impermanent loss subsequently. This kind of liquidity helps the system because it is market neutral so it doesn’t put the debt pool into as much risk. The liquidity is purely market making rather than pushing price of the synthetic asset above peg. This should reduce the amount of premiums paid for the synthetic assets.

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It’s an interesting idea. I think BAO FINANCE is going down that road for their synth no ?

Hey guys,

This never got much traction in the forum but I hope you don’t mind me raising it again.

If minters could stake their LP tokens as collateral it would dramatically increase capital efficiency, and therefore lower slippage on Mirror. Minters could very easily enter a market neutral position at 150% collateral ratio, where as now they need to be naked short at 150% and then their offsetting long in the LP isn’t counted as collateral at all. This means they need to supply many multiples of capital that is essentially wasted.

If minters could supply LP token as collateral their long and short offsets, so you could also make argument that these types of positions could have even lower collateral requirements even for volatile stocks because the minter is only exposed to impermanent loss rather than actual short risk. So these positions are less risky than average for the debt pool.

Please let me know your thoughts.

Thank you!


I’ve also thought about this idea, but this may have a few risks:

  1. You could mint with LP collateral, and provide liquidity again… it would just be like creating a derivative on top of derivative endlessly, while the intrinsic value of the all positions is relatively low
  2. Right now, withdrawn collateral is charged 1.5% protocol fee, which gets sent to collector contract to be swapped into MIR for MIR stakers. LPs cannot be swapped directly to the pools. They can be used to withdraw liquidity, and then swapped for MIR, but this would need a major contract migration.

But I’m not saying that this should be impossible. But we would need a way to disincentivize users from abusing LP collateral repetition (repeat LP->Mint → LP process endlessly.)

Maybe we could add a separate min_collateral_ratio for LP token collateral, and set them at a really high rate (say 750% for example)

@Sihyeok Thoughts?