Mirror, Mirror on the Wall, Who’s the Greediest of Them All
In-depth tutorial on implementing delta-neutral strategy with Mirror Protocol V2
The recent Mirror Protocol V2 update has brought myriads of new features that include addition of pre-IPO assets, new collateral options, and short LP tokens. In this blog post, we will shed lights on the powerful features of Mirror V2, and demonstrate how to yield-farm with “delta-neutral” strategy, where users’ position value will remain intact whether the market goes up or down.
Disclaimer: Not investment advice. More details can be found on official Mirror Protocol Documentation
What’s New in Mirror V2?
Mirror protocol is a DeFi Protocol built on Terra network that enables the creation, trading and liquidity providing of mAssets. It allows the users to gain exposure on assets outside the realm of cryptocurrency, without actually being outside cryptocurrency. This means you can purchase stocks such as $TSLA or $TWTR with Terra USD (UST) and gain exposure to their price action. The V2 update has brought multiple new features that allow users to implement compelling investment strategies with minimum loss. Below are some notable new features of Mirror V2.
- Pre-IPO Assets
- Improved Governance Incentives
- Poll Quorom
- New Collaterals
- Short LP Tokens
Ways to Earn on Mirror Protocol
There are multiple ways to utilize Mirror protocol to earn rewards. Let’s start with some simpler strategies.
Mirror Governance (Low risk)
With MIR, the governance token of Mirror Protocol, you can stake/vote to earn rewards that are paid in MIR.
By purchasing, staking and voting on various governance polls, you can earn MIR rewards at ~22% APR (accessed on Jul 13th).
Long Farming (LP, Exposed to IL Risk)
Long farming on Mirror is like liquidity providing on other DeFi protocols. Below are some of the farming options available on Mirror V2
Let’s take a look at mSLV, a synthetic mAsset that tracks the price of SLV (iShares Silver Trust). Currently, it offers 29.10% APR on long farming and 96.65% APR on short farming. First, let’s explore how to long farm mSLV. Click on “Long Farm” for mSLV and you will be directed to below UI.
Like any other LP farm you have to provide equal amount of the paired assets, mSLV and UST in our case. Here, we will assume that you have purchased mSLV and will provide equal UST value amounts of mSLV and UST. (Borrowing here will be a different strategy and for “traditional” LP farming, you should be using mSLV that you own, instead of ones you’ve borrowed). Enter desired amount of mSLV (the opposite pair will be automatically calculated) click on “Farm” and approve transaction on Terra Wallet. You are now long farming mSLV-UST pair and the rewards will accrue in mSLV asset.
LP farming comes with the risk of Impermanent Loss. This happens when one of the asset deviates in price and the liquidity you have provided ends up being less than the original value. Please refer to the following blog post on Impermanent Loss, it’s crucial to understand IL risk before providing liquidity.
Short Farming (sLP, Exposed to Liquidation Risk) — Newly added in V2
Short farming feature has been introduced in V2 to help mAssets to maintain it’s peg on the real-asset price. With short farming, you are betting on a value of an mAsset to decrease over a given time frame. Click on “Short Farm” for mSLV and you will be directed to the below UI.
With short-farming (or simply shorting in TradFi), you are borrowing an asset then selling immediately, hoping that the price will decrease over a given time period, so that you can buy back the same asset at a cheaper price. This way, you can pay back the borrowed asset, and also make profit from the price difference.
Mirror V2 update allows users to short mAssets, or borrow (while earning lucrative APR from it at the same time!) using collateral of your choice.
With short-farming, you are providing collateral to borrow assets you wish to “short”. (You have to “over-collateralize” by minimum 150% to 300% depending on the volatility of the underlying asset.) Pick a collateral asset of your choice (UST, aUST are the safest bet since the collateral asset does not change in value), set desired collateral ratio, click on “Farm” and approve transaction on Terra Wallet. The returned UST corresponds to the amount you will receive when the protocol “sells” the borrowed asset for you. Keep in mind this is accessible 2 weeks after you start farming. (This is used to buy back the borrowed asset, when you decide to “close” your short position!)
Delta-Neutral Strategy
Now, with either long or short farming, you are exposed to the price action of the asset. When long farming you want mSLV to go up in value, while when short farming, you want the price of mSLV to go lower so that you can buy back the borrowed asset at a lower price.
But what if you wanted to earn farming rewards without worrying about the price action of the underlying asset? This is where we implement delta-neutral strategy. As the name suggests, delta(difference) - neutral(no change) strategy is where we position ourselves so that the price action of the underlying asset does not impact the $ value of our investment. Simply put, if you were holding $100 worth of SLV and shorting $100 worth of SLV, you can pay back the borrowed SLV at anytime with the SLV you are holding, thus delta-neutral. This is also called “hedging” your position and you will not be affected whether the price goes up or down.
Now, why would anybody long and short at the same time? The value of my investment will remain the same, as the name suggests. On Mirror V2, the lucrative APR% introduced above is the exact reason why we implement such strategy; to earn those APR%, while mitigating our position from IL and liquidation risks.
Now that we have covered Long farming and Short farming, implementing delta-neutral strategy is pretty straight-forward. Let’s cover few different ways to stay delta-neutral, while earning the above mentioned farming APR%. With below delta-neutral strategies we will assume 1000 UST as our total investment budget. (Needless to say, this strategy works with any amount of UST)
Short LP Farming + Spot Long Position
This delta neutral strategy utilizes farming only on the short side, while spot holding (buying and holding) equal amount of the shorted asset. Due to safe collateral ratio of 200%, you will be investing 2/3 of your total budget on the short-farming side, and 1/3 on the spot long side. We will take mCOIN as our short LP farming + spot long example.
- Short-farm mCOIN with 666.6 UST, by following the mSLV example above. This will buy you 333.3 UST worth of mCOIN with 200% collateral ratio. At current price, you will have borrowed about 1.1585 mCOIN.
- Purchase equal amount of shorted mCOIN (1.1585) on the Trade UI.
You have now set-up a delta-neutral position on mCOIN, while earning 61.33% APR on short farming. Here your risk is only on the short-farming side. (Liquidation risk in case the price soars and your collateral ratio goes below 150%)
Short LP Farming + Long LP Farming
This strategy utilizes farming on both the short and long side. This exposes us to both liquidation and impermanent risk, but we will be able to accrue rewards on both the short and long side at the same time while staying delta-neutral. Long LP requires equal amount of asset and UST to provide, so you will be investing 1/2 of your total budget on the short-farming side, and 1/2 on the long-farming side. We will take mTWTR as our short LP farming + long LP farming example.
- Short-farm mTWTR with 500 UST, by following the mSLV example above. This will buy you 250 UST worth of mCOIN with 200% collateral ratio. At current price, you will have borrowed about 3.556 mTWTR.
- Purchase equal amount of shorted mTWTR (3.556) on the Trade UI.
- Provide long farming liquidity with 3.556 mTWTR and 250 UST on the long farm UI.
You have now set-up a delta-neutral position on mTWTR, while earning 32.98% APR on short-farming AND 35.31% APR on long farming. However, with this strategy, you are now exposed to both liquidation risk on the short-farming side, and impermanent loss risk on the long farming side. With this strategy, we recommend using assets with lower price volatility
Long Borrow Farming
The third strategy, is utilizing borrowed mAsset to long-farm, unlike the above 2 examples where the mAsset were bought on the long-side. By borrowing AND long farming, we are already delta-neutral without having to worry about short-farming. We will take mNFLX as our long borrow farming example.
- Borrow mNFLX with 666.6 UST. This will get you 333.3 UST worth of mNFLX at 200% collateral ratio. At current price, you will have borrowed about 0.59 mNFLX.
- Provide long farm liquidity with 0.59 mNFLX and 333.3 UST on the long farm UI.
Even though you are not short-farming, your position is delta-neutral since you have borrowed your nNFLX that you have provided LP with. Here you are earning 37.98% APR on the long-farming side, and exposed to impermanent loss risk.
In this article, we have explored different ways to earn rewards on the updated Mirror Protocol V2, along with three different delta-neutral strategies. For the sake of our readership, we have decided to keep the tutorial simpler by using UST as our collateral (with borrow and short-farming), but the real power of Mirror V2 comes with the pool of various collaterals we can use. We’d like to remind our readers that utilizing aUST instead of UST will accrue 20% APY while earning all the above strategies’ APR%. So for those who’d like to accrue some extra APY on your investment, we suggest you provide aUST as collateral on all above steps.
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