$$$ KPO and CZM $$$: DeFi - Terra Mirror Protocol Delta-Neutral Strategies

Saturday, August 21, 2021

DeFi - Terra Mirror Protocol Delta-Neutral Strategies

I was telling my friends/"business partners" about Terra which I blogged here - DeFi - Terra (LUNA) & Anchor Protocol (20% Interest) and they got interested in Mirror Protocol and the delta-neutral strategies it offers despite the risk of liquidation. Before I knew it, I was convinced by them that it is actually relatively safe. lol. I guessed I got traumatized by my previous experience when my leveraged CAKE farm got liquidated in Alpaca Finance (BSC) which I mentioned here

The main difference for Mirror is that the underlying assets are mostly mirrored stocks called mAssets compared to various crypto coins in Alpaca. It is less likely to be liquidated in Mirror because stocks do not swing as much. Let's take a look at a few examples:
- Apple Best Day - 9.3%
- Silver ETF Best Day - 10%

Basically, if I were to open a short position in Mirror at a 200% collateral ratio (liquidation happens at 150%), the underlying stock will have to increase by 33.33% before I get liquidated. It is highly unlikely for stocks especially those with the highest market capitalization to increase by >30% overnight which was my initial concern - getting liquidated while I am sleeping. I have opened a few positions for a few weeks and it looks pretty "stable" (no risk of liquidation). With the main risk out of the picture, let me share more about the strategy.

Delta-neutral simply means you earn/profit regardless if the underlying asset increases/decreases in price by owning and shorting the asset at the same time. This can be executed in 3 different ways in Mirror:
1. Short farm the mAsset, buy the equivalent number of mAsset that was shorted and hold (easiest to execute but typically the lowest yield as short farm yield fluctuates a lot)
2. Short farm the mAsset, buy the equivalent number of mAsset that was shorted, provide liquidity with an equivalent amount of UST (LP) to long farm (highest yield with some exposure to impermanent loss)
3. Borrow the mAsset, provide liquidity with an equivalent amount of UST (LP) to long farm (exposure to impermanent loss)

Let's take a look at an example of strategies 1 and 2 using mAAPL with an initial capital of 10k UST.

0.15 UST to open this short position

1. I provide $5,000 UST worth of collateral in aUST (which is an interest bearing asset earning 20%. One can get aUST by depositing UST into Anchor) to borrow the mAAPL shares to short. The money from shorting will be unlocked after 2 weeks.

1.52 UST to buy the mAAPL shares

2. Immediately open another position by buying the equivalent number of mAAPL shares which I shorted above.

At this point in time, my position in mAAPL is delta-neutral and I will be earning a 21.21% yield on my short farm of ~$2.5k UST as well as 20% on my $5k UST collateral no matter if the price of AAPL goes up or down. This is strategy 1. 

1.62 UST to provide liquidity to long farm

3. Provide liquidity with an equivalent amount of UST (mAAPL-UST LP) to long farm

With that, my position in mAAPL is still delta-neutral and I will be earning a 21.21% yield on my short farm of ~$2.5k UST, 33.53% on my $5k UST worth of LP on the long farm as well as 20% on my $5k UST collateral. This is strategy 2.

As usual, I have created a spreadsheet if you want to check it out further. There is another spreadsheet made by some CEO that is actually incorrect where it is calculated/instructing one to pledge collateral to both short and borrow the mAsset. If you truly understand it, you will know that's not a delta-neutral position at all. lol.

After 2 weeks, you will be able to claim the money from shorting the mAsset which lowers the capital to just 7.5k UST to farm in Mirror.

Meanwhile, the collaterals are growing at 20% (you can compare with the above screenshot when I first opened the short position by pledging the aUST) which also lowers the risk of liquidation.

The world of crypto is just mind-blowing. With the above delta-neutral strategies, I am getting 30-50% yield with minimum risk (liquidation). Where can we find this in the world of traditional finance?

On a side note, I have moved most of my crypto in BSC, Polygon and Fantom over to Terra. The plan is to move everything to Terra in the next few weeks/months with the majority of our funds invested into LUNA. Oddly, our crypto portfolio is very concentrated and not diversified at all. lol. Stay tuned to our next monthly update for a more detailed breakdown :)

To the moon!

Anyway, I have blogged about different ways to leverage crypto to build wealth for people with different risk appetites:
The safer approach using stablecoins
Risky approach but more hassle-free
Highest risk and you are on your own
- DeFi apps on Binance Smart Chain (BSC) such as PancakeSwap and PancakeBunny
- DeFi - Terra Mirror Protocol Delta Neutral Strategies

If you are interested in the platform I am using, do sign up using our referral links for some bonus :)
BlockFi: Deposits US$100 or more into your BlockFi Interest Account (BIA), you will earn US$10 in BTC and we will earn US$10 in BTC too.
Celsius Network: Earn US$40 in BTC with your first transfer of US$400 or more and we will earn US$40 in BTC too.
CakeDeFi - Deposits US$50 or more into your CakeDeFi account, you will earn US$30 in DFI and we will earn US$10 in DFI too.
Gemini: We will both receive US$10 of bitcoin after you buy or sell US$100.

On a side note, Futu's moomoo app sign-up promotion is now slightly different (Pfizer and Haidilao shares are given with deposit and 3 trades each on US and HK markets. T&C here) and has been extended to 19:59 hrs SGT, 31st August 2021! As part of the collaboration, I will be giving away 5 moomoo 'neck-fix and chill' pillow (not for sale but can be redeemed in the app) to 5 randomly chosen readers who signed up through our referral link for this month! More information can be found here - Futu's moomoo August Campaign + Merchandise Giveaway!

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  1. I have saw briefly that there is an 'Insurance Coverage' for both anchor / Mirror, are you using any? Or do you see it as necessary

    1. Hi Marc,

      Apologies on the late reply. Hasn't been checking blog/email recently.

      Yes, there are a few but I am not using any. I think it is up to your level of comfort and whether getting that insurance will give you a piece of mind/better sleep. The way I see it is the moment there are insurance coverage, it simply means the products (UST/Anchor/Mirror) are relatively safe because insurance is there to make money for its shareholders/"stakers".

      I am fairly certain UST will not depeg to the level (~0.86) where you will be able to make a claim from the coverage. In addition, after col 5 upgrade, there is a new dapp (white whale) that will help to maintain peg as well. I will rather deposit UST/luna there and earn/profit from helping to maintain peg then to buy insurance. lol.

  2. hi kpo,
    for your delta-neutral strategy, can i close the short position by "offering" the long position that I bought at the same time? does it work this way or I need to close off by buying the same amount of shares at the current price.


    1. Hi ADN,

      Yes. You close the short by using what you bought for the long position. If you long farm what you bought and ended up with lesser mtokens due to IL, then just buy the difference to close the short position.

    2. thank you so much KPO. I will follow yr steps when closing my position. All the best~!

    3. Np. All the best to you too!