In this video, I’m going to explain how I now own some Tesla Stocks, but I paid for them with crypto, using a decentralized application so that no governments can track me. There are many benefits to this, but if you want to watch exactly how I actually bought Tesla with Ethereum… head towards the end of this video for a step-by-step walkthrough. Until then, this video will be explaining how it was possible using something called the Mirror Protocol.
What is the Mirror Protocol?
Per their whitepaper, “Mirror is a protocol that allows anyone to issue and trade synthetic assets that track the price of real world assets.” So Mirror has a whole world of possibilities, to allow crypto investors to buy assets that represent all kinds of things from precious metals like gold, to real estate like a mutlifamily house, all the way to stocks like Tesla. This is an amazing idea, but there’s only one issue I see with it so far. Mirror creates these assets synthetically, which means they just create a token that tracks the price to a real world object with an oracle. This is lesser to the asset-backed version, where each crypto token actually represents a full item in the real world and is redeemable for it at any time.
Nevertheless, synthetic assets allow investors exposure to many things they couldn’t have otherwise. Keeping in mind the biggest downfall, which is that they are synthetic, there are some benefits to synthetic tokens as well. However, we initially had the benefits in this video, but it was so lengthy we decided to create another video from that section for a video about synthetic assets, so you’ll have to subscribe and hit the bell icon if you want to watch that video, plus subscribing also rewards our hard work here on this channel.
“One of the main advantages of the Mirror Protocol is that all mAssets are backed by stable collateral (UST) that allows for relatively lower levels of collateralization.” This is a fancy way of saying they’re at least backed by something. In V2, they are letting users use Luna, MIR, ANC, and a few other minor tokens as collateral to mint mAssets.
Personally, I’m not sure if this was a good move, because now these mAssets are backed by assets that can drastically change price. Also, MIR is a farm token, meaning it’s inflationary, they will literally just keep printing more and more and more and more, and if you understand some basic economics, you know what that means for the price. I suppose it’s okay to be backed by these tokens as long as you’re always overcollateralized and liquidate any positions that are overleveraged, that’s the beautiful thing about smart contracts.
Risks of the Terra Blockchain
Mirror is a protocol that started on the Terra blockchain. There are risks associated with the terra ecosystem, and we do plan to cover those very soon, so be on the lookout for that video. In short, if the Terra ecosystem falls, Mirror may be susceptible to collateral damage as well.
I’m not sure why they didn’t create a similar protocol on Polygon or BSC or even Ethereum, but mAssets can be moved from the Terra network to the Ethereum network. The token creation process doesn’t actually happen on the Ethereum blockchain, but you can provide liquidity through Uniswap with your bridged tokens.
Let’s dig into the specifics of how these mAssets are created, tracked to a real world price, and then destroyed.
Minting an mAsset
To create these mAssets, all you have to do is lock up some collateral. For most assets, you lock up around 150% of what the asset is worth and you get to ‘mint’, or create a new token that is representative of that. For riskier assets, like GME, you must lock up around 300% collateral. Technically, this process is called ‘borrowing’ a token, since you’re using one token like UST as collateral and then taking out a loan of mTSLA.
For example, if you wanted to create a token on the Terra ecosystem that ‘mirrors’ Ethereum, you lock up some money and Mirror will mint and lend you a ‘mEth” token, which could be pronounced Meth, but this mEth token is redeemable at any time for the price of Ethereum. We’ll get to that in a second.
Targeting a price
How does the token stay the same price as the true asset though, especially if it’s a synthetic asset, and not a token backed by a real world thing? There are two parts to this:
- The asset is always backed by at least 100% of what it is worth. We call this ‘collateralized’. If the token price rises more than the collateral given to back it, it is liquidated by someone who can snatch up some profit by doing so.
- The real price of the asset is learned and tracked through an oracle, or a trusted 3rd party that gives us reliable data. With this data, we can create an arbitrage opportunity for traders to buy and sell so that the prices match! We haven’t talked about Oracles on this channel at all, but there is a cool video coming up about them, so if you’re made it this far in the video, you’re going to really like that video… and since I’ve already asked you to subscribe, you should definitely click that like button, I promise it’ll feel good! Plus it makes our team feel good, a perfect win-win situation.
Burning an mAsset
Burning is the opposite of minting, you are trading an mAsset that you borrowed for a certain amount of another asset that was locked up.
Examples are always the best way to learn, so let’s go through a way of making some money with this. In this example, let’s use Tesla.
Let's break this down. Tesla has a collateral requirement of 150%. This means if we want to mint $100 worth of Tesla (let's assume Tesla's stock is currently $100, for this video), we would need to give Mirror $150 of a coin or token that they accept as collateral. In this case, we are going to go with UST, which is Terra's stablecoin.
First off, if you only deposited 150%, you would be right at the risk of being liquidated, so we are going to do 200%, to give us a buffer of safety from being liquidated. So $200 of that coin you deposited stays deposited as collateral. This technically gives you a long exposure to this token, although since it's a stablecoin, we hope it stays worth $200.
Next, after minting an mTSLA token, you have a short position in Tesla. Essentially, you have borrowed 1 mTSLA, which now is worth $100. 1 mTSLA could change price though, you could owe Mirror $120 one day and $80 the next, based on the price of 1 Tesla.
Finally, if you don't sell your mTSLA tokens, you are also long on Tesla. This long and the previous short cancel each other out. You've borrowed 1 mTSLA, but you also own 1 mTSLA, so as long as the price of tesla doesn't skyrocket, your position won't be liquidated. But it also means you won't gain any profits or losses from Tesla changing prices. If that's the case, why mint mTSLA in the first place?
There are 3 things someone smart could do with this situation:
1) Provide their mTSLA token as liquidity to earn those sweet, sweet, exchange fees from traders using an exchange
2) Sell their mTSLA token, effectively creating a short position, with the hopes of buying another mTSLA token in the future to unlock their initial collateral
3) Stake or Yield Farm their mTSLA to the Mirror Protocol to earn MIR tokens
To wrap this section up, only MINT a mAsset if you plan on doing something useful with it, because if you just want to invest in a stock using crypto, buy the mAsset from someone else.
PreIPO sales
“Mirror V2 brings an innovative mechanism that will allow users to bet on both sides of the trade for pre-IPO assets in a decentralized manner” This is a very new feature that I don’t think has ever been done crypto before. I think they are allowing investors to buy Pre-IPO assets that may appreciate in price when the IPO launches. The problem here is that Mirror users must propose and then vote on the ability to create this IPO token, and usually this proposal and voting time takes longer than it does for an IPO to launch. Very unique idea, but we’ve never seen it done before so it’ll be interesting to see how it pans out.
Tradable and Bridgeable tokens
One of the most important things about Mirror and mAssets is that you can trade them like any other token. You can give them to people, you can sell them off-chain, and you can even bridge them to other chains like Ethereum. This means you could buy mTesla on Ethereum if you wanted to. You can also earn incentives through providing liquidity as any other token. There are a few other things you can do with it though...
Long and Short Yield Farming
Long and Short farms deserve their own video, so I won’t go in depth about them on this video. If you know what you are doing, you can utilize this tool as a way to keep the platform prices stable, and as a way to Yield Farm (as Mirror is currently giving out rewards). In fact, some would say Yield Farming is one of the reasons that investors come to Mirror in the first place.
MIR Token Governance
The Mirror Protocol also has its own token, the MIR token. This token is used for 2 things:
- Farming rewards to investors on the platform
- Governance on the platform. MIR holders can stake their tokens and propose and vote on new ideas to the protocol.
Keep in mind that this is a “farm” token, which means it is a token that’s inflationary by nature and given to users of the platform as a reward. In the past, we’ve seen a lot of farm tokens consistently drop in price because people earn them, then sell them. There’s a catch though, MIR will stop printing new tokens in around 4 years, which is unique for farm tokens.
We understand that this video is long, complicated, and uses lots of financial terms that may be new to you, so consider giving it another watch… It took us a long time to even write this script.
Without further ado, you guys seem to appreciate step-by-step tutorials and I’m going to try to make this one a bit slower so if you want to follow along you can. Here is a video explaining how I bought Tesla using the Mirror protocol on the Terra blockchain.
