Synthetic assets mimic or simulate underlying real world assets, such as stocks, bonds, fiat currencies, indexes or commodities. In the crypto world, blockchain-based synthetic assets can also be referred to as synths or tokenised derivatives.
Mirror is a DeFi protocol launched by Terraform Labs in December 2020 that enables the creation of certain synthetic assets. These are known as mirror assets (mAssets) which are so-called because they reflect real-world assets on the stock exchange. For example, mAssets on the protocol include mTSLA and mAPPL which mirror the listed share prices of Tesla and Apple respectively.
The Mirror Protocol governance token is the Mirror Token or MIR, and the platform for mAsset trading is known as Terraswap.
How Mirror works
Traders on the protocol can buy or sell mAssets against Terra UST stablecoins on the Terraswap platform. The protocol checks real-world asset prices every 30 seconds, and if they drift too far from the primary market, mAsset traders are incentivised to act (e.g. by selling, purchasing, minting or burning).
For minting, Mirror uses Terra stablecoins as collateral, and has a minimum 150% collateral ratio requirement. This means an issuer must lock up at least 150% of the current value of the asset in stablecoins or mAssets. In cases where the asset value goes over the collateralisation threshold, the collateral is liquidated.
Advantages of these assets
The main benefit of a crypto synthetic asset is that it can give you exposure to an underlying asset without needing to hold that asset. This means as an investor, you could hold tokens that track the value of the asset or its derivative, but all within the cryptocurrency ecosystem.
The Mirror Protocol provides a highly decentralised method for transacting with synthetic assets. It provides greater accessibility to financial assets for investors that would otherwise be locked out due to lack of capital.
Mirror also has no geographical constraints, which means that anyone in any part of the world can participate in, for example, US equity markets. It also operates 24/7 which means investors are not limited by normal trading hours.
This type of protocol has the potential to democratise financial markets around the world.
However, a holder of synthetic stocks does have fewer rights than traditional shareholders. For example, they won’t be able to vote at AGMs, gain access to financial reports or receive dividends.
How Mirror compares to Synthetix
Mirror’s main current rival is Synthetix, which has been operating longer and holds a much higher value of currently staked assets. Mirror does appear to have some advantages though, such as considerably more non-crypto assets and public equities trading on its platform. Also, the higher volatility of Synthetix’s governance token means it requires a collateralisation ratio for minting of 750% (compared to Mirror’s 150%).
So, while Mirror might be the new kid on the block, it looks set to become a serious contender in the synthetic asset stakes!