Algorithmic Stablecoin MIM Losing Peg

Unlike dai where you have plain eth or USDc deposited to get $1 dai, in Magic Internet Money (MIM) you go one turtle down by first depositing eth to a Yearn pool to get yvWETH, so called interest-bearing tokens (ibTKN).

Now you can use this yv-WETH or USDt to act as the collateral for the $1 MIM which is kept in check by the price feed oracles that would liquidate your collateral if it falls below the amount you borrowed.

This has kept fine, but it’s starting to come under some considerable pressure with it not quite keeping to that 1 MIM = $1 recently.

Mim depeg, Jan 2022

Some have pointed out extremes such as $35 million MIM going for $8 million USDc, when it’s meant to be one to one.

Apparently there has been some loss of confidence due to it being revealed that an anon dev involved with the project, Sifu, is Michael Patryn, co-founder of the now defunct QuadrigaCX Canadian exchange that went bankrupt with $190 million missing. A DAO vote is now ongoing on whether to remove him. That has led to some pressure as people pay down their debt following a huge fall in eth’s price and the recent loss of confidence.

Dai is doing fine for example with it at $0.999 despite eth falling 50% recently, but MIM is newer and more complicated so there’s a disbalance presumably because there’s too much demand either for liquidations – which balance the stablecoin algo – or for arbitrage.

Mark Richardson, Product Architect & Head of Research at Bancor, puts the blame on the latter.

Curve MIM arbitrage, Jan 2022

In showing the above graph, Richardson says the best place to arbitrage MIM, Curve, is effectively flooded so much that “the pool has essentially exhausted its ability to support arbitrage for $MIM.”

Curve specializes in stabilizing stablecoins through pools like USDc, USDt, Dai and MIM, as well as other dollar and now even euro etc., tokens.

They have a mathematical formula that forms a curve of sorts to zoom in by 1000x or more in differences between these tokens, and so making arbitraging possible even when there are small differences, like $0.001.

You could manually arbitrage as well, but you’d need big amounts and the gains might not be sufficient to account for opportunity costs when the price difference is still fairly small at $0.97 rather than $1.

With Curve, even that small difference is good enough to take advantage, and so everybody is using them and they’re being flooded.

However, a $0.97 price isn’t that unusual in the history of stablecoins. USDt once went to $0.8 and even less if memory recalls.

As shown on the featured image there were some trades on Uniswap that get close to those levels, but charts from both Coinmarketcap and Coingeko show across exchanges it’s at $0.97.

If it manages to retain that level and eventually stabilizes, then it shouldn’t be much of a problem, not least because Dai also went down to $0.97 in March 2020 when eth collapsed.

For individual traders however they may be losing some money, although it should make debt repayment cheaper, but Curve is apparently doing a good job stabelizing this with Richardson stating:

“The apparent resilience of the price peg is thanks to Curve Finance and its stunning ability to absorb stablecoin arbitrage trading, regardless of market sentiment.”

So the algo is generally still keeping up despite huge price pressures with MIM having a market cap of some $1.9 billion.

But as usual this borrowing works fine when prices go up. However, they can lead to a lot of losses if prices move down, especially with speed.

All suggesting this is a sign that there have been quite a lot of liquidations in collateralized defi or people are getting out, hence too many are paying down MIM and not enough are minting new ones, leading to de-collateralization.

Something that should balance out presuming it is as robust as Dai which used to have fairly common $0.98s, with it perhaps a testament to Curve that such levels now are fairly rare.

But lower levels would be concerning with it unclear why Uniswap seems to be out of line as MIM is currently at $0.91 there, while Sushiswap has it at $0.97.

With $1 million, that would be a difference of $60,000 where you buy MIM on Uniswap and then sell it on Sushi, but it may be Uni just doesn’t have enough liquidity leading to such potential blips that may be temporary.

Update: Article updated to include the reason for this potential loss of confidence being the revelation that QuadrigaCX co-founder Michael Patryn is involved with the project.