Mirror Protocol: Development and Crisis

Introduction

Heading into the bullish season of 2021, Mirror Protocol emerged as a DeFi protocol that enabled the trading of synthetic assets and gave traders price exposure to real-world assets by reflecting their price activity on-chain.

Mirror Protocol successfully launched on Terra and Ethereum Blockchains in December 2020 but in an unfortunate turn of events, the Protocol is now inactive, following a $90 million hack, the Terra UST collapse, and the cessation of price feed support by Band Protocol. Mirror Protocol has been dormant since August 26, 2022. This article takes a closer look at Mirror Protocol, highlighting the factors that led to its closure and the implications for the Web3 ecosystem.

What is Mirror Protocol?

Mirror Protocol is a decentralized finance (DeFi) platform built primarily on the Terra UST blockchain, which allows users to create and trade mirrored assets (mAssets). Most mirrored assets were US equities which traditionally had limited access.

Kicking off with $54 million, in total value locked (TVL). By June 2021, the Mirror protocol had crossed $2 billion in TVL and $1 billion in liquidity, making it a top 15 DeFi Protocol and a leading cross-chain protocol. Mirror protocol gave crypto traders access to traditional financial assets. The smart contracts issued by Mirror helped create ‘synthetic’ assets/shares of several companies. So what are synthetic assets?

Synthetic Assets

Source: Asia Blockchain Review

Synthetic assets refer to a mix of financial instruments that simulate the value of another asset. These can be assets like stocks, bonds, commodities, real estate, or other types of investments. Essentially, synthetic assets allow investors to gain exposure to the underlying asset without owning it. This provides global accessibility to foreign markets and reduces the friction when switching between different assets.

History of Mirror Protocol

Mirror Protocol was launched by Terraform Labs, the company behind the Terra UST blockchain. Its founders Daniel Shin and Do Kwon launched Mirror Protocol in December 2020 to decentralize tokens and financial assets with the aim of promoting cryptocurrency and blockchain technology adoption by focusing on its usability and price stability. MIR holders have complete freedom to conduct governance of the protocol. This gave the MIR token holders an extra advantage over other users.

How Does Mirror Protocol Work?

Source: CoinGecko

The mirrored assets (mAssets) created by the Mirror protocol were synthetic versions of their real-life counterparts. They mimicked the price of the underlying assets and could be traded on secondary markets just like the underlying assets. These included the Terraswap Automated Market Maker from Terra and Ethereum’s Uniswap.

During its existence, it mirrored major U.S. equities and ETFs. The Mirror Protocol used three types of tokens: MIR tokens, Liquidity Provider (LP) tokens, and mAsset tokens. Liquidity providers used LP tokens to add liquidity to pools and users were encouraged to stake LP tokens for governance purposes.

Features of Mirror Protocol

Mirror Wallet

Mirror Protocol’s wallet, the Mirror Wallet, was managed by ATQ Capital. Mirror Wallet is a simple wallet connected to the protocol offering various synthetic investment options.

Designed with user convenience in mind, Mirror Wallet is a fully non-custodial mobile wallet. It allowed 13 mirrored assets (mAssets) of the most popular US tech stocks, including Apple, Google, Tesla, Netflix, Twitter, Microsoft Corporation, Amazon, and Alibaba using TerraUSD (UST). Traders could engage in buying and selling assets that are typically difficult to access for many investors in foreign markets without costs or excessive regulatory hurdles precluding them from participating.

Minting

To commence trading on Mirror Protocol, Synthetic mAssets were minted by locking up collateral at an over-collateralization ratio set by the governance parameters of Mirror Protocol. Collateralization could be done with UST, or even with an already existing mAsset that had a value of at least 150% of the price of the underlying asset that the user wants to synthesize.

If the collateral ratio fell below the predetermined minimum, the mAsset might be liquidated, which meant that users needed to deposit more collateral if they decided to hold their positions. A user could always withdraw their collateral and burn their mAsset if they had a sufficient amount of deposited collateral.

Trading

A mirrored asset could be bought or sold against UST. Mirror claimed their protocol had lower network transaction fees than many of the industry’s leading decentralized trading platforms. Trading on Mirror Protocol did not require know-your-customer (KYC) verification or anti-money laundering procedures. You could trade Apple stocks as mApple with the UST stablecoin from anywhere in the world.

Liquidity Provision

Liquidity Providers supply the liquidity needed by AMM pools. Like Uniswap, liquidity providers deposit an equivalent value of UST and the mAsset at the AMM, and as a reward, they receive LP tokens that are funded by the trading fees of the pool.

Staking

There were two types of stakers found on Mirror Protocol. The first were the liquidity providers who could stake the LP tokens they received and receive staking rewards in the form of native MIR tokens based on the emission schedule. The second type of staking is done by MIR token holders who staked MIR and earn the withdrawal fees from the collateralized debt position (CDP).

Oracle Feeder

The Oracle Feeder was a significant sector in the Mirror ecosystem, a mechanism used to ensure that the mAssets retained a match with their underlying assets. Band Protocol operated the Oracle Feeder. The Oracle price and the exchange price created an incentive structure for trading by creating arbitrage opportunities. This also maintained the mAsset price in a tight range near the actual price of the underlying asset.

What is the MIR Token?

The MIR is an ERC-20 token that governs the Mirror Protocol. The MIR token served the following purposes:

• Capture Collateralized Debt Position (CDP) closure fees: Upon closure of Mirror CDPs a 1.5% fee was charged on the collateral. The fees were aggregated daily to purchase MIR tokens on Terraswap and paid to MIR stakers.
• Protocol governance: The Mirror token is useful in proposing and voting on major changes to the protocol, including altering trading fee percentages, managing position fees, and making expenditure suggestions to the on-chain communal pool containing MIR tokens. This pool can finance developer grants and introduce added incentives to the system.

Tokenomics

Source: Coin98 Insights

With no MIR token pre-mined, users could farm MIR tokens by providing liquidity on Uniswap on the Ethereum Blockchain and equivalent pairs on Terraswap on the Terra UST blockchain. Liquidity providers would be rewarded generously for four years, with rewards depreciating by 50% until the end of year four. Also, 370 million tokens were to be distributed over four years with 0% reserved for insiders.

A total of 18.3 million MIR was airdropped to LUNA stakers and UNI holders as a reward for early adopters and contributors. Verified by snapshots taken on 11/23/2020 03:36 AM UTC, each user with LUNA staked received MIR on a pro-rata basis and each UNI holder with at least 100 UNI received 220 MIR.

Further, over the course of the first year 18.3 million MIR tokens were distributed to LUNA stakers every week (every 100,000 blocks), This is in a bid to align with the growth of the Mirror Protocol with the network security of the base layer, Terra.

Industry Product Comparison

For a better understanding of the operation of Mirror protocol, let’s look at related projects offering similar services.

Synthetix

Source: Synthetix Twitter

Before the emergence of Mirror protocol, there were various synthetic trading platforms in the crypto space. The most popular approach to synthetic assets that track real-world assets was Synthetix, which operates similarly.

Synthetix is an Ethereum-based protocol that allows for issuing synthetic assets mirroring other assets, like Bitcoin or the Euro. A key distinction when comparing Synthetix to Mirror protocol lies in their choice of collateral. Synthetix requires the use of SNX tokens, while Mirror requires the Terra USD stablecoin or other mAssets. Given the volatility of the SNX tokens, Synthetix demands a hefty collateralization ratio of 750%. In contrast, Mirror’s requirement is 150%. This substantial difference in collateralization means that Synthetix is notably less capital-efficient than Mirror, which reveals why Mirror protocol had an increasing user base compared to other platforms. However, this amazing use case came to an end when the Mirror protocol ceased to operate.

The Fate of Mirror Protocol

On August 11, 2022, Mirror Protocol ceased operations, following Band Protocol’s withdrawal of price feed support. In an X (Twitter) post dated August 11, 2022, Band Protocol announced it will cease price feed support on Terra Classic, meaning that Mirror Protocol’s feeds will also be stopped following the collapse of Terra USD (UST) and the halt of the Terra blockchain earlier in May 2022.

UST was an algorithmic stablecoin backed by LUNA which had no real utility. LUNA is Terra blockchain’s native token, used for staking and governing its ecosystem, while Terra USD (UST) remains pegged to the U.S. dollar, LUNA absorbs its price fluctuations. Users can stake LUNA as validators, who manage and confirm transactions, and can earn rewards from transaction fees. As Terra’s usage grows, Luna’s worth increases.

Its burn and mint mechanism became unsustainable following the UST de-pegging. The panic led people to sell their LUNA and UST, essentially triggering a bank run, and because of the network congestion during that time, the arbitrageurs via the market module could not handle the downward pressure. It then led to the devaluation of both LUNA and UST.

Additionally, a $90 million hack also contributed to the demise of the project. In October 2021, unidentified hackers had identified a loophole, utilizing a set of redundant IDs, that allowed them to withdraw a huge disproportionate amount of collateral compared to what they held. This hack was due to a flawed code, which permitted unauthorized fund withdrawals.

Currently, Mirror Protocol’s social media platforms are inactive with X (formerly Twitter) and Medium last updated in August 2022. Its main website is currently inaccessible, and the MIR token, although still available on some exchanges, however, doesn’t have any utility.

The fate of Mirror Protocol highlights the uncertainty and volatility of the cryptocurrency market. Mirror Protocol was a project that had an upward trajectory and attracted investors but still failed to thrive.

Implications

Before ceasing its operations, Mirror Protocol responsibly alerted its users, urging them to finalize their positions and withdraw their assets. Even though the value of its token had declined, users had the opportunity to recover some portion of their investments.

Following the downturn of Terra Luna, the MIR token price trajectory appears to be influenced by prominent market participants. There’s speculation around the MIR token being used for market strategies like “pump and dump,” wherein influential traders might aim to ensnare smaller investors. This turbulence is likely to make the token’s market behavior particularly unpredictable. As it stands, the trading volume for the MIR token remains low, and its price trajectory appears to be in a bearish phase.

Overall, investing in Mirror Protocol or buying MIR tokens at this time isn’t a good idea, as the platform upon which the token gains its value has ceased operation.

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