Dive Into DeFi

Dive Into DeFi: Level Up Your Traditional Investing with Mirror Finance on Terra

Mirror Protocol offers synthetic stocks on Terra that boast market-beating yields! How can the average user leverage these services?

Outperforming Hedge Funds on Terra!?

This article is an opinion piece on Mirror Protocol and should not be treated as any form of investment advice. Readers should understand the risks associated with investing in digital assets.

If you have read my previous articles, you would know by now that I am a DeFi investor with the goal of producing income with a mix of stable coins and large-cap cryptocurrencies. I became increasingly interested in synthetic stocks in DeFi when Pancakeswap offered boosted MToken pools a few months ago, and I have finally made the leap over to Terra blockchain due to opportunities I simply could not stay away from. Mirror is also accessible via the Ethereum blockchain, but transaction fees are extremely low on Terra, making it the winning choice for me. 

Terra blockchain has been around for several years and boasts some big-name protocols including Mirror and Anchor. My focus is directed towards Mirror as they provide a list of quality synthetic stocks including Microsoft, Apple, Facebook, and Coinbase. The protocol also offers a couple of index funds including QQQ and SPY, and these are what provided me with the motivation to finally get set up on the protocol and make an investment. 

A screenshot of a phoneDescription automatically generated with low confidence

The Thesis

When it comes to picking my DeFi portfolio investments, I like to have a strong reason, or narrative, for why I should be holding the assets in the first place. The yield is icing on the cake, and the underlying position needs to be a worthwhile investment on its own. Mirror’s synthetic stock offerings fit my investment objectives very well, providing quality underlying assets as well as diversification within my portfolio that is much needed given the volatility of the cryptocurrency market. 

The index funds provided by Mirror really interest me given the historical success of index fund investing. I’m sure many have already heard that most professional fund managers fail to outperform broad market index funds, but the math on Mirror Finance liquidity pools makes it so that we can outperform even the best fund managers… on autopilot. This was a revelation that I really could not stay away from. 

Using the QQQ/UST liquidity position as an example, we can do some quick back-of-a-napkin math showing why these positions provide a strong ROI worthy of any portfolio. For starters, we must understand that the position will incur impermanent loss given the pairing with the UST stable coin. I am going to assume that the position will incur somewhere near 50% of the volatility of the QQQ index fund. This means that if the index fund increases in value by 8% in one year, our position will increase in value by 4%. 

While giving up the appreciation is a bummer, the current yield earned from staking in the liquidity position is sitting at 43.16%. The investor also gives up the annual dividend of .72% as the synthetic version acts as a derivative product. But, the net benefit of investing in the QQQ index fund in this manner far exceeds the losses. An investor in the QQQ/UST liquidity position could expect to outperform a traditional investment in the QQQ index fund by around 35% to 40% per year. This calculation also ignores the trading fees gained within the liquidity position itself which drives that estimation higher. 

I have failed to find a yield optimizer on the Terra blockchain so far, but the ecosystem is growing, and I would not be surprised to see one emerge. For now, my plan will be to harvest my MIR yield and reinvest according to my strategy. 

The Risks

The value propositions for Mirror Finance liquidity positions are in my opinion, next level, ignoring the risks on the table would be a disservice. The risks include:

  • UST stable coin de-pegs from $1
  • Synthetic stocks de-peg from the asset they track.
  • Smart contract failure
  • Total loss of funds (theft or loss)

I do not have a way to measure or rate these risks but knowing they are there is always important. Investors can allocate their portfolios according to their risk tolerances. 

Bridging From BSC to Terra

I found setting up my Terra wallet and bridging assets over from BSC to be a pretty simple process. 

1) Assuming you are using Chrome or Brave, you will need to install the Terra Station browser extension and create a new wallet. The Terra Station browser extension can be found here:

2) The Terra Blockchain utilizes the UST token to pay gas fees. UST can be purchased on Pancakeswap. 

3) Terra has a nice bridge available

4) Make sure you are sending from BSC to Terra and select UST as the token you would like to send over. Input your Terra wallet address from your Terra Station address and submit the transaction. 

Once these steps are completed, you can explore the Terra blockchain and the synthetic stocks available on Mirror Finance. This is one protocol I will watch closely as more traditional investment options become available on-chain.

Related News