Mirror Protocol: The Terra-Based Synthetic Asset Protocol
One of the primary convictions of DeFi and the crypto community is to grant broader financial access to many of the world’s financially underserved regions.
The current macroeconomic environment confines the wealth creation of global markets and major asset classes to a small range of influential, geographically-confined economic leaders. The subsequent wealth disparity is fueled by a lack of basic access to financial tooling, services, and capital-efficient models for asset classes ranging from equities to commodities and real estate.
Asset tokenization on permissionless blockchain networks has been proposed as an avenue to reducing barriers to entry into global markets, increasing efficiency, and providing other benefits. However, asset tokenization is a broad topic with both regulatory and technical hurdles limiting its manifestation.
Many of the original tokenization ideas, like security token offerings (STOs), were ill-conceived and blended regulatory problems with incompatible technology. Some of the first successful tokenized asset ideas focused on physical assets. These include NFTs for artwork, fractionalized shares of commercial real estate, and precious metals like gold — such as tokenized IOUs mimicking deposits with reputable custodians.
More recently, and concurrent with the recent DeFi boom, we’ve seen an explosion in the tokenization of abstract asset classes such as stocks, bonds, derivatives, and ETFs. The deluge of DeFi products on permissionless networks like Ethereum has sparked a divergence of tokenized assets into two primary categories:
- Asset-Backed Tokens
- Synthetic Assets
Asset-backed tokens are backed one-to-one with the physical or abstract asset they represent. For example, Wrapped Bitcoin (WBTC) on Ethereum is a one-to-one representation of BTC on Ethereum, but the circulating ERC-20 tokens are only a reflection of BTC that is under the custody of BitGo. The simplicity of the design makes WBTC intuitive to understand, especially from a regulatory standpoint.
However, asset-backed models suffer from some of the same points of friction experienced in TradFi as well. Namely, centralized custody risk, fees, and KYC/AML hurdles for issuers. Enter synthetic assets and Mirror Protocol.
Mirror Protocol — Motivation & Advantages
Mirror Protocol is a DeFi protocol built on Terra’s blockchain for issuing and trading synthetic assets, called Mirrored Assets (mAssets). Mirror users are afforded the opportunity to participate in previously inaccessible markets, whether their former preclusion was dependent on government-dictated restrictions or a lack of capital to participate.
Opposed to the asset-backed token model, synthetic assets on Mirror do not require a one-to-one backing of an asset (either physical or abstract). Instead, they provide synthetic exposure via a price oracle that tracks the underlying asset’s price and is coupled with a robust incentive design.
The primary advantage of synthetic assets is accessibility — for traders, issuers, stakers, and governance participants.
There are no restrictions to the type of synthetic assets reflected on Mirror. Anyone in the world with an Internet connection can plug into Mirror and participate in the exposure to major global assets classes. The synthetic mAssets are also fractionalized, meaning that capital requirements for people with limited capital are reduced, further improving exposure to major assets and deepening the pool of users for accumulating liquidity.
This includes disenfranchised people in countries with onerous capital controls, inflation-prone fiat currencies, high transaction costs, excessive regulatory hurdles, capital constraints, and limited access to modern financial tooling.
The accessibility of Mirror is accentuated by the censorship-resistance and reduced costs of synthetic assets. There is no third-party custody risk, and the issuance of mAssets is not burdened by variable KYC/AML restrictions within different regions of the world. Pair those advantages with the community-driven governance model of Mirror, and the reason why synthetic assets are a valuable avenue to democratizing access to financial services and wealth creation begins to crystallize.
Mirror Protocol Overview
Mirror’s mAssets mimic the price of real-world assets. The mAssets can be traded on secondary markets, including Terra’s AMM Terraswap and Ethereum’s Uniswap. Currently, Mirror’s mAssets menu encompasses a combination of major US tech stocks and ETFs, with more assets to follow. The MIR token is the governance token of the Mirror ecosystem, and also is deployed as an incentive stream for staking.
You can find the current metrics and list of tradable mAssets on the Mirror Web Wallet.
Five primary participants interact in the Mirror ecosystem:
- Traders
- Minters
- Liquidity Providers
- Stakers
- Oracle Feeder
Traders buy and sell mAssets on Mirror using Terra’s UST stablecoin as the trading pair peg on DEXs like Terraswap. This has significant ramifications for extending access to foreign markets, like the US stock market. For example, Alice from SE Asia can gain exposure to Google stock without going through expensive international brokers, onerous KYC/AML processes, or paying excessive capital gains taxes on foreign equities that are a byproduct of stringent capital controls.
Alice only needs to purchase mGOOGL, the synth reflection on Mirror, with a few clicks.
Minters create and issue mAssets by locking up collateral at a minimum over-collateralization ratio set by the Mirror governance parameters. To mint an mAsset, a minter enters a collateralized debt position (CDP) similar to how Maker issues Dai. The CDPs can accept collateral in either UST or other mAssets. Minters need to ward off liquidation of their position by posting more collateral should the collateral ratio fall below the predetermined minimum.
Minters can also withdraw their position at any moment as long as their collateralization ratio is sufficient — the corresponding issued mAsset is burned in return for the CDP collateral (e.g., UST).
The Mirror Liquidity Providers (LPs) supply liquidity to AMM pools, such as on TerraSwap. Similar to Uniswap, LPs provide an equivalent value of the mAsset and UST to the AMM pair to earn LP tokens accrued as a reward via the trading fees of the pool.
Stakers on Mirror take two forms. First, LPs can stake their LP tokens, which accrue staking rewards in the native MIR token from its emission schedule. Second, MIR token holders can stake MIR to earn the withdrawal fees from the CDP.
Finally, the Oracle Feeder is the primary mechanism that mAssets retain their correlation to their reflected assets. The Oracle Feeder is elected via governance and is currently operated by Band Protocol. A notable incentive structure around the price of mAssets is how arbitrage opportunities between the oracle price and exchange price (e.g., on TerraSwap), keep the mAsset’s price in a tight range around the real asset’s price.
For example, if the TerraSwap price for the mAsset mAAPL is trading at a premium to the oracle price, then market participants are incentivized to mint and sell mAAPL at the premium price on Terraswap to make a profit — reducing the price divergence between the oracle and exchange price in the process. The opposite is also true, where if mAAPL’s TerraSwap price is trading below the oracle price, then minters are encouraged to purchase and burn mAAPL — profiting from the reduced payout on their CDP.
Overall, the incentives of participants in Mirror are balanced in a manner conducive to value creation, censorship-resistant issuance/exposure to TradFi assets, and widespread adoption. The MIR token is distributed as a reward to enforce net-positive behavior in the Mirror ecosystem, and MIR is staked in polls for whitelisting mAssets and changing the parameters of Mirror, such as minimum collateral ratios.
Adoption & Moving Forward
Mirror Protocol is currently live in both a web app and mobile form. The web app contains full functionality for the protocol, including all of the trading, minting, staking, and governance features. Additionally, Mirror has a bridge to Ethereum, called Shuttle, which enables users to port mAssets from Terra to Ethereum. The result is deeper liquidity and the first cross-chain bridge for synthetic assets.
There’s currently over $72 million (UST) locked in Mirror Protocol, with the market cap of the issued mAssets exceeding $36 million.
The mobile app, Mirror Wallet, is operated by ATQ Capital. While it currently only enables the trading feature, Mirror Wallet is open-source, which will encourage further expansion of the feature set and even a new DeFi concept that Terra Co-Founder and CEO, Do Kwon, coined “user farming.”
Moving forward, governance proposals on Mirror are free to whitelist virtually any asset available in TradFi markets, granting the type of simple exposure to global wealth creation currently absent in many regions of the world.
Eventually, the goal is to sustain a thriving list of liquid mAssets integrated with sleek user interfaces rivaling Robinhood and more complex tooling such as derivatives. Mirror’s primary advantage over Robinhood? Its global pool of potential users is much broader due to its accessibility and censorship-resistance.
Terra is reportedly even mapping out a plan to provide a yield to mAssets via its upcoming Anchor Protocol product.
Currently, mAsset owners do not receive dividends or cash flow on their mAssets since they are only holding a synthetic exposure of the correlated asset based on price. However, the integration of Anchor and Mirror would enable a high-yield, low-volatility rate for holders of mAssets as if they were holding a stock that paid juicy dividends.
Synthetic assets are powerful. They are composable, censorship-resistant, and accessible.
Their underlying mechanics may be complicated, but simplifying the user experience on the front-end can foster monumental change in democratizing access to wealth creation. After all, that’s the goal underscoring the push towards a more inclusive financial system that defines DeFi so well. Who knows, maybe even the next iteration of Robinhood’s cultural dominance among Gen Z will manifest as DeFi degens swapping mAssets with high yields on AMMs that trade billions in volume daily.
You can stay up to date on Mirror Protocol’s progress via the web app and its Twitter account and Telegram group.
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OhNoCryptocurrency via https://www.ohnocrypto.com/ @Brian Curran, @Khareem Sudlow