An Overview of UMA – Universal Market Access
UMA is a Decentralized Finance (DeFi) protocol built on Ethereum that allows developers to create trustless synthetic tokens based on any value.
The revolution will be tokenized. Anything that can be tokenized, will be. While this may seem like some far-off future prospect, it may not be as far as you’d think.
UMA aims to make this future a reality – a trustless market can be created for almost anything that includes numbers. An ounce of gold, the price of a commodity, the Total Value Locked (TVL) in Sushi, almost anything that you can think of.
UMA aims to make the development process so simple that anyone with a bit of technical aptitude can build their own DeFi products. Add to that the inherent properties of Ethereum, such as trustlessness and censorship-resistance, and we’ve got ourselves something profoundly exciting.
Let’s see what UMA is all about.
What is UMA?
How does the UMA oracle system work?
What is the UMA token used for?
Examples of UMA synthetic tokens
UMA KPI options airdrop
What is UMA?
UMA is an open-source platform for creating trustless, synthetic financial products. While a broad category, the developers of UMA have taken a unique approach when it comes to several aspects of the protocol.
UMA allows developers (but eventually, almost anyone) to create a derivative token based on essentially any metric, number, or value. Due to the unique architecture of the protocol, UMA makes very particular derivative markets possible that other similar platforms couldn’t allow for.
Traditional agreements are enforced through legal contracts which are bound to their particular legal jurisdictions. At the same time, the internet is global, and information can freely flow between these different jurisdictions (for the most part).
In contrast, smart contracts powered by UMA can be enforced through cryptography, blockchain, and economic incentives. Opening up access to financial services regardless of the jurisdiction is one of the core missions of UMA.
This idea can be used to port traditional financial instruments into the world of DeFi, but also create fundamentally new types of financial instruments – which is where the real novelty lies.
Naturally, this kind of open scaffolding takes a long time to kickstart. It’s a bit of an abstract concept, so UMA has been a bit of a sleeper when it comes to the decentralized derivatives space.
How does the UMA oracle system work?
So, a token can be created for almost anything with a value. But how do we know if that value is ‘correct’? The oracle problem is a challenge when it comes to blockchain-based systems.
One of the more unusual aspects of UMA is how it settles disputes. The way this usually works is that a trusted oracle pushes the price of say, gold onto the blockchain, and apps can use that as a reference.
The base assumption behind UMA, however, is that the counterparties will follow their contract correctly, and oracles are only used if there is a dispute. In other words, disputes are settled optimistically, somewhat similar to how an Optimistic rollup works. So, the protocol assumes that everyone involved is acting as they should; unless they don’t, in which case, the oracle is involved.
This may offer several advantages over having to ping the oracle more frequently. For one thing, it can allow for “priceless” synthetic tokens since the smart contract doesn’t have to know the value of the collateral at all times. Actually, this is similar to how legal contracts work all around the world right now.
This kind of dispute system is also cheaper in regards to how many times the oracle has to bring a price to the blockchain. It may also be more secure, as oracle exploits are less likely to happen since it isn’t being used by default.
But maybe the most exciting implication of a dispute resolution system like this is how it can allow for a much broader range of values to be used as a reference for the contracts. Sure, we have highly valid sources for the ‘correct’ price of bitcoin or ether on the blockchain, but oracles may not support all types of data we’d want to use in such a system.
For example, how would we know the price of water or corn in a particular country if the oracle doesn’t report it? This system allows for a much larger basket of potential “price identifiers”, values to be used as a basis in token contracts.
Whether this oracle solution is superior to others is yet to be seen, but the implications are certainly exciting.
What is the UMA token used for?
So, the oracle is pinged, but how are these disputes settled then? This is where UMA token holders come in. They are essentially the jury on any dispute that happens in the network. It’s worth noting that by design, disputes shouldn’t happen a lot to allow for smooth operation. But if they do, token holders decide through a voting mechanism what the correct outcome should be.
In addition, these price identifiers mentioned earlier have to be approved by token holders through the governance system.
Examples of UMA synthetic tokens
UMA has been around for a while, but we’ve just begun seeing some interesting applications built using this piece of infrastructure. Let’s go through some of the synthetic tokens currently in existence.
By the way, these aren’t all of them – you can track more on the UMA Projects page.
uSTONKS
uSTONKS is a collaboration with Yam Finance, the DAO surrounding the OG food coin that kickstarted the yield farming craze back in 2020. This token was developed in collaboration with Yam through the Degenerative Finance initiative.
uSTONKS is a collection of the 10 most popular Wall Street Bets stocks and aims to capture the sentiment of the r/WSB community in a synthetic token on Ethereum.
The options to have access to traditional assets on the blockchain are getting more frequent; even so, that may not be what most current crypto users are interested in.
uGAS
uGAS, also a part of Degenerative Finance, is a synthetic future tracking the price of gas on Ethereum.
Each uGAS token represents 1,000,000 gas. The expiry of these tokens is determined by the median gas price of all Ethereum transactions in the past 30 days.
The uGAS token is an innovative solution for Ethereum users to hedge against fluctuating gas prices.
TVL Snacks
TVL Snacks measures the combined value of deposited assets in all DeFi protocols according to DeFi Pulse. TVL Snacks offers an easy way to speculate on the amount of assets locked in DeFi as a whole.
Dominance Finance
Dominance Finance is a Bitcoin dominance token that tracks the market share of Bitcoin vs. the market share of altcoins.
UMA KPI options airdrop
Community incentives play a significant role in bringing adoption to any DeFi protocol. In what seems like a first, UMA chose a unique approach to incentivizing adoption.
Instead of a straight-up airdrop, they allow eligible participants to claim options contracts tied to a Key Performance Indicator (KPI) related to the platform. This not only highlights the capabilities of the protocol to a larger audience but also may be a harbinger of an emerging trend for incentivizing community behavior.
You see, airdrops can be pretty successful. The idea is that by airdropping tokens to current users of a platform, the incentives get aligned. Ideally, this should ensure that the success of users is aligned with the success of the platform.
However, it isn’t necessarily clear how that should happen in reality. Users can contribute, but maybe it’ll have an effect, maybe it won’t. UMA allows for these incentives to be quantified in a way that’s clear for everyone involved. In other words, the project can clearly define what metric success should be benchmarked against. In this case, it’s the TVL in UMA. This way, anyone who holds these options is aligned with the goals and success of the protocol.
Each user who is eligible based on their past activity on an Ethereum address is entitled to these options. The higher the TVL is at the expiry, the larger amount of UMA tokens these options will expire to.
This is a fascinating way to think about incentive design, and likely a pioneer of new types of quasi-airdrops that make the process more efficient in driving adoption for DeFi apps.
Summary
UMA builds infrastructure for enforcing decentralized financial contracts on the blockchain. It allows anyone to create trustless, censorship-resistant DeFi products on Ethereum.
The ultimate success of UMA relies on building the developer tools to be as simple to use as possible. Just like almost anyone with any technical capability can generate content on YouTube, Medium, Twitch, decentralized app development needs to be as intuitive as possible.