Introducing: Mirror Short Leveraged aUST Farm

Since the launch of our v1 vaults, the yield landscape on the Terra blockchain has shifted. While we wanted to offer our users Anchor Earn beating yield via a Mirror Delta-neutral strategy, the reduction in MIR token incentives in Dec 2021 has rendered this strategy uncompetitive.

Hence, the Nexus team has opted to replace the vault with a Short Leveraged aUST Farm (a tentative name, of course) in order to deliver on our original promise of providing users with a superior yield opportunity on their UST.

This is a leverage-based strategy built on top of Mirror and Anchor Protocol. When users deposit UST, the code executes the following procedures:

  1. Deposit UST into Anchor Protocol, receiving aUST

  2. Provide aUST as collateral at Mirror Protocol, minting mAssets as specified by users

  3. Sell the mAsset on an AMM like Terraswap, receiving UST

  4. Repeat the process until the desired leverage factor and estimated APR is reached

By executing this strategy, users will be earning the Anchor Earn rate on a much larger UST amount than if they were to simply deposit the UST into Anchor.

We project that this product could return upwards of 35% yield to users who have deposited for a full year. This estimation takes into account a 7% appreciation in mSPY price and also the 1.5% CDP closure fee levied by Mirror Protocol.

This vault, in a nutshell, consists of the following features:

  • Automated "one-click’ setup and exit from the strategy

  • Simulation of product performance on vault page

  • Yield opportunity that does not require the use of MIR token incentives

  • Position management and monitoring dashboard on Nexus Protocol

  • Stop-loss thresholds as configured by the user

We also wish to highlight some risks to users who will use the product:

Price Risk:

Remember that users are in effect, shorting mAssets by participating in this strategy as mAssets are sold on Terraswap immediately after minting. Hence, users will have to bear the full implications of price movements in the underlying mAsset. Where mAsset prices appreciate, users will see their ‘debt’ grow thus eating away at their leveraged aUST returns. However, if prices decline, users may opt to close their position ‘early’ and benefit from capital gain accrued by their short position. To help users manage risk, Nexus will introduce a stop-loss feature for this product, allowing users to fully unwind their borrowing position if the price of the mAsset passes a specified threshold defined by the user. In that vein, it is also possible to have a take-profit feature though the possibility of this is still under study.

Liquidation Risk:

As leverage is involved in this product, users must be aware of the potential for liquidation if their chosen mAsset price appreciates past the limits set by Mirror Protocol parameters. While equities exhibit less volatile price action compared to cryptoassets, we still caution users to ensure that they monitor and maintain a safe LTV ratio.

However, by virtue of the Short Leveraged aUST Farm being a ‘commercial’ product designed by the Nexus team, there are efficiencies to be reaped when user positions come up for liquidation. Instead of utilising the Mirror Protocol fixed discount mechanism for bidding, Nexus will be able to manage liquidations for users by purchasing mAssets and using these to close user positions, thus resulting in a net reduction in losses. More information about this at a later date.

mAsset Pool Slippage:

While users who are considering this strategy can view various metrics about the strategy before they enter, it is a reality that many mAsset pools may not be deep enough to prevent trade slippage arising from this strategy. This will be the case especially if users deploy a large amount of UST and max out the leverage factor.

By deploying the Short Leveraged aUST Farm, we also hope to bring additional benefits to the ecosystem by:

  • Providing selling pressure on mAssets will help mAssets approach their oracle price peg, a problem that persists to this day

  • Grow trading volume and utilization of mAsset pools

Development Status

Having completed the initial simulation and viability assessment for the strategy, we are now pushing this strategy on to smart contract development. In the meantime, we will be happy to receive feedback about the product from the community on how we can optimise the product or provide additional features that users will find useful.

We hope you’re excited for this product as we are!

3 Likes

Compared to vanilla Mirror short farms, this is certainly a far superior product. Has your vision changed since the writing of this post?

Couple of thoughts:

  1. Could you incorporate automated LTV management into this strategy? To me that’s the cornerstone of the Nexus brand, and I would love to see it proliferate across the Nexus offering.

  2. As I understand it, the user would have to monitor each MSLaF position and related mAsset ticker independently? Position management should be made more intuitive and simple than what it would seem to be based on this. The concept is a bit confusing, since the main yield component is simple leveraged aUST, but the main focus of attention is the shorted mAsset. It feels dissonant as it is presented here.

  3. Mirror has a huge problem with the lack of effective arbitrage on their mAssets, the premiums are frankly ridiculous and question the sustainability of the entire protocol. Could this Nexus mechanism be utilised to alleviate that specifically? If we imagine this as a Mirror Short Vault that would not be targeted on a single mAsset, but instead would buy every mAsset in proportion to their premium, it could exert effective downwards pressure on overappreciated mAssets.

  4. Helping Mirror with a service described in point 3. would be very valuable to the protocol, and this value could be expressed in eg. MIR airdrops for the Mirror Short Vault investors. Synergistic partnerships would stimulate growth for both protocols and create excellent marketing opportunities.


General marketing related observation
If I could ask the dev team for more consistent updates on your progress and the evolution of your thinking, that would be much appreciated. Your posts are what drives community engagement and activity, which is the main bulk of your marketing power – and that drives your user acquisition.

If you were simply to make weekly updates on each of the new products in your pipeline, even if you didn’t have very much to share every time, you would massively increase the traffic on your channels and enable the community to organically build hype and momentum around the protocol.

Be brave & be proud of yourselves and share what you’re doing! We can’t wait to hear it!