Mirror: Investment Thesis for the Next Robinhood?

  • Mirror allows anyone to cheaply trade stocks, commodities, and ETFs
  • Mirror launched in December 2020. Currently it has ~$2 billion in assets locked in the protocol
  • Blockchain-based stocks/commodities could grow to a multi-billion-dollar market, and Mirror is poised to be a leader in the field

The Protocol: The Basics

Mirror is a decentralized protocol that allows anyone to create and trade “synthetic assets”, or on-chain tokens whose price tracks some underlying asset. Today, the most popular assets on the Mirror Protocol are stocks and ETFs such as AAPL, ARKK, BABA, SPY, and USO.

These synthetic assets trade 24/7 with very low fees and are available to anyone around the world with an internet connection.

In many ways, Mirror is the next logical step after Robinhood. Robinhood brought low-cost investing to America while still operating within the limitations of traditional finance. Mirror takes things further by serving a global user base and leveraging Defi.

Mirror is built on the Terra Blockchain, a proof-of-stake chain that has attracted millions of users since it launched in April 2019. Terra supports hundreds of transactions per second with transaction fees around 1% of Ethereum Layer 1.

Terra is home to arguably the most vibrant Defi ecosystem outside of Ethereum-billions of dollars are held on the Terra Blockchain today in protocols such as Anchor and TerraSwap. Terra Labs created both the Terra Blockchain and the Mirror Protocol.

The Protocol: How It Works

Of course, the key to Mirror is ensuring its synthetic assets track the price of their underlying asset. Every 15 seconds, the Mirror Protocol receives price data on the underlying assets, and the protocol uses economic incentives to close any discrepancies.

Mirror’s Synthetic Assets (known as mAssets) are fully collateralized. New mAssets only enter circulation when an investor ‘mints’ them by depositing collateral into Mirror. Minting can be thought of as borrowing the mAsset from the protocol. To get the collateral back, the minter must return their mAssets to the protocol. This is very similar to the way the DAI stablecoin works.

Once mAssets are minted, typically a minter will deposit them into TerraSwap to earn fees as a liquidity provider (LP). At any point, a minter can withdraw his assets from TerraSwap and return them to the Mirror Protocol to get back his collateral. Annual LP returns on supplying assets to TerraSwap can be 20-50%, which is part of what has driven Mirror’s growth.

If an mAsset trades at a discount to its underlying, minters who have sold their mAssets are more incentivized to purchase and return the mAsset to pay down their debt at a discount. As minters take advantage, mAsset supply falls and prices rise.

banner

If an mAsset trades at a premium to its underlying, users who mint and then sell the mAsset on TerraSwap are eligible to earn rewards (called SLP rewards). If an mAsset’s premium increases, SLP rewards increase as well. SLP rewards causes sell pressure to increase and premiums to fall. These economic incentives have kept mAssets trading within 5% of their underlying price (for the most part).

To recap, we have seen how mAssets maintain their peg and some ways you can passively earn money by being an LP. There are many, many strategies to earn substantial returns in and around the Mirror Protocol, and they will be covered in future articles. But these next few sections will focus on one of the most effective strategies: simply investing in the Mirror Protocol token.

The MIR Protocol Token

The MIR Token is at the center of this whole system. MIR tokens receive protocol cash flows and are used for governance. Investing in MIR is like purchasing equity in the Mirror Protocol.

One important note: the supply of MIR is not yet fixed. It will increase over time until December 2024. As you read this, new MIR tokens are slowly being created and distributed to incentivize usage of the protocol. For example, these inflationary rewards are used for LP and SLP rewards. Here is the MIR token distribution schedule:

Within the current token model, MIR tokens acquire their value in a couple ways:

  1. Anytime someone withdraws their collateral from Mirror by burning mAssets, they incur a 1.5% fee which is distributed to MIR stakers. These are the primary form of protocol cash flows.
  2. MIR tokens can be supplied to Liquidity Pools where MIR tokens are traded to earn trading fees. Additionally, liquidity providers in the UST-MIR pool on TerraSwap and Uniswap receive additional MIR token rewards that come from inflation.
  3. Being able to govern the protocol
    • Voting on how the very large community pool will be used (essentially the Mirror Protocol’s treasury)
    • Voting on adding new mAssets and their parameters etc.

So, broadly speaking, investing in the MIR token is a bet on increased usage of the protocol.

Investment Thesis

The Vision

At this point, you should have a good sense of what the Mirror Protocol is, how it works, and the role of the MIR token. At current prices, the MIR token market cap is $330 mn, but it could go a lot higher than that under the right circumstances.

The basic case is this: Currently, the total value of outstanding mAssets is $433 mn. But synthetic assets on the blockchain could be a huge market (in the billions within the next 2 years), and Mirror is very well-positioned to be a leader in the space. Additionally, MIR is cheap right now relative to its competitors and to its historic ATH.

Investing in decentralized synthetic assets has many advantages over investing in the underlying assets. Here are the most important:

  1. Ease-of-use: No KYC and a simple UI. Anyone around the world can instantly trade, regardless of their country’s regulations.

  2. Consistent and fixed rules: no company or government can shut down or pause mAsset trading. There will be no GME fiascos on Mirror, where a centralized brokerage pauses trading during critical periods of volatility.

  3. Composability: meaning other protocols can easily build on top of Mirror and use mAssets. This is perhaps the most powerful feature of Defi. Composability means permissionless innovation, which ultimately means more opportunities for Mirror users. As an example, mAssets can be used to market-make with TerraSwap. This allows mAsset holders to earn an additional 20-50% yield on top of their mAsset returns (although this isn’t riskless).

  4. Low fees: mAsset trades cost a couple cents on the Terra Blockchain

Billions in new synthetic assets could be minted as retail traders take advantage of these benefits. Some of the largest growth categories might be commodities and investors purchasing stocks that do not trade in their domestic markets.

Mirror is very well-positioned to take advantage of growing demand for synthetic assets. They have the best product on the market, with a strong team behind it and further tailwinds that come from a growing ecosystem.

Mirror has one real competitor-Synthetix. Synthetix is a decentralized protocol built on Ethereum that offers synthetic versions of foreign currencies, stocks, and commodities. Compared to Synthetix, Mirror has much lower transaction fees. A Synthetix asset trade could cost ~$30, while an mAsset trade costs cents on Terra. Synthetix is trying to fix this with Optimism, but onboarding to Optimism is still expensive. There will be a duopoly for the foreseeable future, but Mirror has some advantages.

Additionally, MIR should benefit as the Terra ecosystem grows. Coinbase’s recent listing of LUNA and UST was another piece of good news in this regard.

Terra Labs has a vision of making Terra the Defi chain for everyday users. They have a three-pronged plan of attack to do this: build world-class payments, savings, and investing applications:

As more everyday users pay with CHAI and save in Anchor, it is only natural that they will start investing in mAAPL or mBABA with Mirror. This is especially true for younger users who may not be well-acquainted with traditional brokerages. Why sign up with a brokerage when you can buy mAAPL with a couple clicks, and use it to earn 20-50% in additional LP rewards on top of your AAPL return.

Terra Labs and the broader Terra Community have shown their ability to execute and innovate, and they will keep the Mirror Protocol ahead of the curve.

The Numbers

Now may be a particularly good time to invest. MIR has fallen from its ATH during the broader crypto downturn. MIR is currently trading at $4.55, or 63% below its all-time high of $12.40. Additionally, MIR is cheap relative to its closest competitor-Synthetix:

Below is a DCF analysis of MIR under the current economic model. The analysis models out the value of future token cash flows under the following growth trajectories for the Mirror Protocol:

The analysis suggests that under MIR’s current token model, cash flows are not high enough to support a strong valuation unless the protocol grows quite large. But MIR’s token model should improve over time.

Mirror is like a startup. It has some traction but is still prioritizing growth over profits and figuring out its business model. As MIR tweaks its token model, it can move closer to the SNX multiples discussed above.

Conclusion
Mirror is a significant financial innovation that builds on Robinhood’s mission. It is poised to be the market leader in what could be a very important space. However, the MIR token model must improve to maximally exploit the opportunity. Although the business model is imperfect, Mirror shows substantial potential.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

Subscribe to our Newsletter