Mirror DEX Solution: New Pool Type Proposal

Multiplex Sub-Pool — AMM Type: (Virtual) Constant Product

Abstract
The Multiplex Sub-Pool Virtual AMM functions whereby a main UST pool distributes equal proportions of UST according to current reference prices to be paired with individually pooled mAssets. This mechanism equalizes premiums to the same percent globally, improves liquidity depth when exercising multiple trades over time, and allows for more unique liquidity provision methods.

Introduction
A noticeable problem with Mirror is that premiums are inherently complex to deal with. Even without Short Farms and Delta Neutral positions, premiums are evaluated on a per mAsset basis. Liquidity is also a significant issue for mAssets. Users that wish to purchase/sell in large volumes experience extreme amounts of slippage and huge price-impacts and must wait for a premium or discount to subside before buying/selling more. Current liquidity provision methods only allow 50:50 provision which forces users to hold both sides of the pool to earn LP rewards.

Methods
This brief model examines the differences between three, normal, Constant Product pools and a Multiplex Sub-Pool implementation in how premiums are evaluated. Initial concentrations of the three Constant Product pools are chosen and compared to when the UST present in all of the normal pools is instead pooled into a Multiplex Sub-Pool with the same amount and allocation of mAssets.

In this scenario, we are given three, normal pools with different concentrations of UST and mAsset [UST, mAsset].

Review the example below to see how we compare these pools under normal conditions and under Multiplex Sub-Pool conditions to evaluate premiums.

Example

What does this do?
Compares Multiple Constant Product AMM pricings to a Multiplex Sub-Pool AMM’s pricing versus an external reference price (Oracle Price)

Discussion
According to the price premium analysis, the normal pools have a wide range of premiums and discounts from an ~11% premium to a ~9% discount that are all isolated from one another.

For the Multiplex Sub-Pool solution, after computing μ and applying it to the oracle-equivalent value of each pooled mAsset to determine each new UST allocation, γ, we’re given a global discount of ~3%.

Under this new pool design, capital efficiency is improved. This is due to how the perpetual allocation of UST to each swap pair interacts with a pool post-swap. Suppose a user executes a swap on a low liquidity pair that would push the premium far off-peg. In a normal pool, users would have to arbitrage the premium back to the oracle price. This new pool design instead re-allocates UST from other swap pairs to equalize premiums.

Because UST is separated from mAsset, and due to the modularity of vAMMs (the type that this pool would utilize), single sided LP also becomes an option which opens the door for new premium reduction incentives using LP rewards.

Conclusion
Implementing a Multiplex Sub-Pool would be useful in attempting to stabilize premiums and address forward concerns about liquidity.

The Multiplex Sub-Pool vAMM Solution:

1. Equalizes premiums to be the same no matter the swap pair ’n’. This is useful as premiums/discounts become a single, global phenomenon.
2. Improves liquidity depth.
3. Allows single sided LP to exist.

Implementing a Multiplex Sub-Pool allows premiums to be addressed on a global scale compared to on a per mAsset basis. Importantly, it would allow reward allocation to more effectively sway liquidity providers than it does currently, especially with single sided LP.

As a final thought, I will provide suggestion as to the type of reward structure to use to fully integrate this pool type into Mirror to reduce premiums:
The implementation of Curve-esque reward gauges (3 types):

1. Individual Gauges: Rewards are gauged according to simple demand for more mAsset liquidity with a fixed UST LP reward: 50% UST, 50% mAssets
2. Global Gauges: Rewards are gauged according to simple demand/votes for either UST or mAsset. (**)% UST, (1 — **)% mAsset.
3. Hybrid: Rewards are gauged at both the global and per-mAsset level.

Let me know what you think! Discussions are happening all the time: feel free to post any responses/questions with a link to this article in Mirror Protocol’s Discord and Forum, or simply comment below!

Here’s a link to the forum post: https://forum.mirror.finance/t/mirror-dex-solution/3074

Discord: https://discord.gg/KYC22sngFn

Mirror Protocol Forum: https://forum.mirror.finance/