Every now and then, DeFi protocols spring up in the Cryptocurrency market. Developers design these protocols with novel technologies to proffer a permanent solution to the challenges within the financial service institutions.
The Universal Market Access UMA is one of them. UMA is the brainchild of Hart Lambur with other professionals of like minds.
In this UMA review, we’ll explore multiple facets of the DeFi protocol. Also, we will trace the history, features, and benefits. You will find its functions and the gap it is filling in the crypto space. So, if you’re keen on learning more, keep reading.
A Brief History of UMA
Hart was a professional trader at Goldman Sachs with background knowledge in computer science. He left his trading business to join crypto fully. Hart first discovered Risk Labs in 2017, a protocol for transferring synthetic risk.
He was able to raise $4 million with this open-source protocol from Dragonfly and Bain Capital. With the capital, he developed a unique cryptocurrency. Also, within the same period, Hart united with seven other professionals, including Regina Cai and Allison Lu.
Allison Lu was formally the Goldman Sachs Vice President who started working with Hart in 2018. They designed an economic Oracle-based protocol for verifying data known as UMA ‘Data Verification mechanism’.
Regina Cai is an educated financial engineer and financial analyst at Princeton. She also contributed a significant quota in UMA development.
In December 2018, they released a draft of the UMA project White paper. The developers announced the full UMA project days later, with the launching of USStocks as its first Mainnet product.
The USStocks is an ERC20 special token that tracks the U.S top 500 stocks. These top U.S stocks allow crypto owners to invest in the U.S stock market.
What Is UMA?
Universal Market Acess (UMA) is one of the protocols on Ethereum. It enables users to trade any crypto assets they want with ERC-20 tokens. UMA enables users to use unique collateralized synthetic crypto tokens capable of tracking the prices of everything they want. Hence, UMA enables members to trade assets of any kind using ERC-20 tokens even without accessing the assets.
The protocol operates without the presence of a central authority or a single failure point. This helps anyone to have exposure to assets that would ordinarily be unreachable.
UMA features two parts, namely; A self-enforcing contract used for implementing financial contracts. And an Oracle “ provably honest” to margin and value these contracts. The platform supports financial innovations through blockchains with concepts gotten from traditional financial derivatives (fiat).
Like other cryptocurrency tokens in DeFi, the UMA crypto token serves as a tool for governance in the platform. It serves as the price oracle for the protocol. The significance of the protocol is because it’s boosting DeFi to good heights.
It allows users to deposit their DAI into another protocol, Compound. There, other users can borrow the DAI and pay interest up to 10% annually. People who make the deposits will then receive aDAI tokens for the investments.
Another important aspect is that users could use their aDAI as collateral. They can mint new Synthetic tokens representing an asset such the Gold. Also, users can create Synthetic tokens that will earn 10% interest every year through the aDAI they’ve locked.
What Does UMA Protocol Do?
In permissionless Defi systems, using legal recourse as a mechanism to finance contracts seems to be difficult. It is capital intensive, and this makes it accessible to only large crypto players.
However, the UMA protocol eliminates this challenging mechanism leaving only “the margin” as the best option. Developers achieved this by creating a trustless and permissionless mechanism that can use only economic incentives to secure the contract.
On a deposit of sufficient collateral into the UMA platform, a user can create a synthetic token for the asset with a contract term for the token. The contract term is then enforceable with the aid of financial incentives.
Normally, a “price oracle” ascertains when any token issuer lacks enough backup finances for their tokens due to price fluctuation (undercollateralized). UMA protocol instead offers financial incentives to its users for identification and liquidation of token issuers they believe to be undercollateralized.
The UMA technology sees the adoption of oracles as a major Defi challenge. This is basically due to their probability of failure due to an unknown virus outbreak (“black swan” financial conditions). And because hackers can easily manipulate them if there is enough cash to corrupt the oracle on the table.
Instead of addressing this challenge, UMA rather uses its oracle only to resolve liquidation problems. They programmed the occurrence of these disputes to be very rare.
With these analyses, UMA is seemingly an “open-sourced” protocol where two parties complementing each other can create and design their unique financial contracts. Each UMA protocol consists of the following five components:
- The counterparts public addresses.
- Functions for maintaining Margin balances.
- Economic terms to determine the contract value and.
- An oracle source for data verification.
- The addition, margin balance, withdrawal, re-margin, settle or terminate functions.
How Does UMA Work
UMA contract operation is easy to comprehend and can be summarized using these 3 elements;
The framework that creates “synthetic token” contracts on its blockchain (Token Facility).
Synthetic tokens are tokens with collateral backings. It has the tendency to experience price fluctuations according to its (token) reference index.
Data Verification Mechanism-DVM
UMA uses an Oracle-based DVM mechanism that has an economic guarantee to eliminate corrupt practices in the system. Since normal Oracle-based protocols can still face corruption, UMA adopts the cost variation principle to checkmate this.
Here, the cost of corrupting the system (CoC) is designed to be higher than the profit from corruption (PFC). The cost value for both CoC and PFC is determined through voting by users (decentralized governance).
More so, the design feature of an oracle-based system with economic guarantees needs to measure the CoC (Cost of Corruption). It also measures the PFC (Profit from Corruption), and ensures CoC remains higher than PFC. More details on this area in the DVM whitepaper.
The governance protocol
Through the voting process, holders of UMA tokens decide on the issues regarding the platform. They determine the type of protocol that can access the platform. Also, they consider the major system parameters, upgrades, and the types of assets to support.
Through the DVM mechanism, UMA token holders can also participate in resolving contract disputes. The “smart contract” is not the sole custodian or owner of the asset. Instead, it is just the counterparty holding the derivates agreement.
Holders of UMA tokens can also use the “Token Facility” smart contract to add new assets or even remove contracts. They even shut down some smart contracts when there’s an emergency case.
Another aspect to consider is that UMA token holders can use the UMIPs (UMA Improvement Proposals) to create a standard consensus for their proposals. The rule is simply that 1 vote requires 1 token, and every proposal must get 51% votes from token holders.
After the proposal has gotten the community approval, the UMA team “Riks Labs” will immediately implement the changes. But, the team has the right to reject a proposal that has garnered a 51% vote.
This is the ability of the UMA smart contracts to create synthetic tokens representing user assets in the UMA platform. The process involves meeting and defining these 3 characteristics. The first one is to get the collateralization requirement.
The second one is the price identifier, while the third is the expiration date. With these three elements, it is easy for anyone to develop a ‘smart contract.’
The person or user who develops the ‘smart contract’ making it available for synthetic tokens is a (Token Facility Owner). After the smart contract creation, other users who wish to participate in the contract to give out more tokens will deposit collateral. These groups are the ‘Token Sponsors”.
For instance, if A ‘Token Facility Owner’ develops a ‘smart contract’ for creating (synthetic) gold tokens. A meets the basic requirement of depositing the collateral before creating it.
Then B ‘Token Sponsor’ seeing that the (synthetic) gold tokens may increase value indicates interest in issuing some token. They are to deposit some sort of backup (collateral) to be able to give out more (synthetic) gold tokens themselves.
Hence, UMA token facility mechanism ensures that counterparties get the collateral without passing through an (on-chain) price feed.
Token Distribution of UMA Protocol
The Risk Lab Foundation created the UMA token. The tokens were 100mm with 2mm which they sent to the UniSwap market. Out of the remaining tokens, they kept 14.5mm for future sales. But 35mm went to users and developers of the network. The pattern of sharing is not yet final for the UMA community’s criticisms and approval.
Relatively 48.5mm tokens went to the founders of Risk Lab, those who contributed early, and other investors. These tokens came with a transfer restriction until 2021.
UMA network gives good rewards to users holding their tokens. This is for users who actively participate in decision making (governance) and accurately responds to request (token cost). Holders who are dormant when making decisions in the platform get penalties as they are in the reward scheme. All user tokens grants have a 4-year programmed vesting schedule.
What is Data Verification Mechanism (DVM)
UMA is a derivative platform that doesn’t depend on the regular price feed. They see oracle’s current usage in DeFi protocol to be fragile and challenging. Unlike the rest of the Defi protocols, UMA doesn’t require a frequent price feed for effective protocol operation.
Other DeFi protocols like Aave uses oracles to liquidate undercollateralized borrower’s through constant checks of their collateral price value. Instead, UMA equips its token holders to frequently do it by checking the collateral amount in the “smart contract.”
This is a no difficult task. Everything on the platform is visible to the public on Etherscan. Simple calculations take place to ascertain if the users met the requirement for collateral. Otherwise, a call for liquidation will follow to liquidate a percentage from the issuer’s total collateral.
This liquidation call is a claim and the “Toke Facility Owner” can dispute it. At this point, a bond can be staked using UMA tokens to be the Disputer. The ‘DVM’ oracle is then called in to fix the dispute. It does this by confirming the actual price of that collateral.
The system penalizes the liquidator if DVM information proves him wrong and rewards the Disputer(the issuer). But if the liquidator is correct, the disputer loses all their bond while the former is given every collateral associated with that token.
Introducing the UMA Token
The token is part of what the market knows as ERC-20 tokens. It is the governance rights that users get to participate in the protocol development. They can also vote on any asset prices if there’s a dispute concerning the liquidation of collateral.
The first supply of the UMA crypto was 100 million. But there’s no had cap to it, meaning that the supply can be deflationary or even inflationary. Some conditions that can influence both conditions include the current value and the amount of the token that users are using for votes.
UMA is not so different from other DeFi tokens. After the release of the token, the price rose to $1.5 and remained so after 3 months. Some days after, the protocol released the “yield dollar,” and it led to a price spike to $5.
From there, the price kept rising until it got to $28, although it later went down by $8. But at press time, UMA is lower in price than what it was during the first few months of launching. It is currently trading at $16.77.
Where to Buy UMA Token?
Anyone searching for UMA tokens to buy, check some decentralized exchanges such as Balancer and Uniswap. But check the price of gas fees before using any DEX to buy UMA. It may cost more when the gas fee price is high.
Another place to buy UMA tokens is a centralized exchange such as Coinbase. You can also navigate to Poloniex and OKEx to grab some of the tokens. But check the liquidity on OKEx and Poloniex to see if you may incur more costs buying from the platforms.
What to Do With UMA tokens?
If you’ve managed to grab some UMA tokens, there are lots of benefits for you. The first place to use your acquisition is in the governance of UMA protocol. Also, it enables users to operate UMA DVM.
Holding the tokens qualifies you to earn some rewards. There are two options for you hers. You can vote on a “price request” from the financial contract. Also, support the system upgrades on the protocol, even for parameter changes.
After voting for the financial contract price requests, you can make inflationary rewards. The rewards will be based on how much you used to vote or stake.
UMA Cryptocurrency Wallet
UMA wallet is a mono wallet used to store, send, receive, and generally manage all UMA tokens. It is one of the ERC-20 Defi tokens designed on Ethereum. So, storing it is easy and simple.
UMA’s easy storage feature enables it to be stored almost in all wallets with Ethereum assets support. Examples of such wallets include Metamask, the commonly used web wallet for easy interaction with (DeFi) protocols.
Other UMA crypto wallets are; Exodus (mobile & desktop), Trezor and ledger(hardware), and Atomi Wallet (mobile & desktop.
UMA tokens can be bought from normal exchanges. The major exchanges where UMA are traded currently include; Coinbase Exchange, OKEx, Huobi Global, ZG.com, and Binance exchange. Others are listed on the cryptocurrency exchange page.
UMA Development Timeline
The beginnings of this protocol weren’t so interesting. People did not mind it much until the release of its token, which they could trade. UMA token was representing the largest stocks in the United States.
After launching the protocol in 2019, the project gained more credence. But in 2020, the project became popular when it created the first “Priceless Synthetic” token. UMA called the token ETHBTC, and it was to track the ETH vs. BTC performance. After the synthetic token, the protocol developed its yield token, which they called yUSD.
All these have been the movement of the UMA protocol, as we’ve uncovered in this UMA review. But the first roadmap they targeted last year was to appear on Coinbase. As of press time, Coinbase is supporting UMA. Anyone can buy, trade, sell or hold it on the exchange.
UMA Review Conclusion
After reading this UMA review, we believe you’ve discovered the benefits of using the UMA protocol. It is an honest decentralized finance platform that offers a great experience. On the protocol, you can tokenize real-world assets even without exposure to them.
Also, you can access the financial markets and derivatives sectors that weren’t accessible before now. The best part is that you get to contribute to how the protocol operates through the tokens. So, if you’ve been wondering about the relevance of this deFi protocol, this UMA review has shown you everything you need to know.