Hi, I’m an experienced trader seeing signs that mAssets may not maintain their peg .
Hear me out friends:
If Mxxx trades 50% higher than xxx (the collateral ratio boundary):
Awesome, we mint Mxxx and sell for UST in pool to make a profit.
But we are already seeing this doesn’t work well with spreads below 50%. MSpy is almost 5% higher than fair market value. There is no mechanism to do arbitrages below the collateral ratio limits.
MORE IMPORTANTLY (and my BIGGEST concern I want to discuss with the creators + community)
If trading price of Mxxx is below actual xxx:
If you buy in pool using UST you get Mxxx much cheaper than actual xxx
But where can you sell/burn the Mxxx as a trader?
Burning is only available to the minters, correct? So I can’t do anything with the Mxxx purchase.
In a liquidity crisis, what would stop the synthetic stock becoming worthless?
If the pools have large amounts of people trying to withdraw liquidity for stablecoins, what is stopping minters from waiting for MAssets to trade close to $0 in the pool before buying their Massets back from the pool and burning their positions for maximum profit??
If Mirror wants to survive through hard times (not just crypto booms), how can we as a community think ahead and ensure mirrored asset prices don’t crash in a liquidity crisis?
I have a suggestion:
Enable the other way around as well: minting UST using mAssets as collateral.
This would ensure that Mirror stocks can’t decrease more than 50% of oracle price. It would give people like me more trust to invest, and it would also add more liquidity to the platform.
We need a way to let arb. traders exchange mAssets for UST near oracle Asset price to avoid an impending synthetic asset price crash. This can be done by:
Having a new mirrored USD token (mUST) that is minted based on real value of mirrored assets and can be exchanged on something like Curve for UST. This will make it easy for arbs. to fix up synth price crashes.
OR provide incentives such as MIR for trades that bring a liquidity pool exchange rate closer to the real-world exchange rate of an asset.
The prices of mAssets has, historically, always drifted back to their peg; however, I agree with you that there’s no fundamental mechanic to keep them tied.
“Minting UST using mAssets as collateral” is essentially the future of Anchor. You’re able to take out leverage against bonded assets (such as mAssets). While this makes it easy to lever up and brings more liquidity to the system, I’m not really sure it solves the deviation from the peg issue…
How does historically make any sense here though? Mirror has been around for 6 months.
I suggest the following:
Allow flash minting with just 100% UST collateral so long as it gets paid in the same block? Or make the protocol Mint Massets automatically to correct a downward price crash of Masset - and then sell the UST gains for MIR?
Wouldn’t that be pretty awesomoe??
I also don’t understand what prevents massets to drop below peg. Regarding your second suggestion in boldface, wouldn’t it rather be better to burn massets if they drop below peg (lowering supply would increase price mechanically due to pool mechanism)? I had made this suggestion before but maybe it doesn’t work, didn’t get much traction in any case.
@DavidCS I understand where you are coming from. But burning massets in the liquidity pool would result in an unfair loss for the liquidity providers, so this is not a good approach.
That’s right, fees would need to be adjusted. Or the same process could be used to maintain the peg in the other direction (minting massets and distribute them to LP when price is above peg). This way LP would gain or lose depending on the situation, would be more fair.