For years, Decentralized Finance (UMA) has become more and more popular and important to our world. There are many projects that make it easier to move from centralized financial services to decentralized financial services, also known as DeFi. Every project thus takes its eye part within the bigger picture. That’s how UMA (Universal Market Access) does it too. Their protocol allows users to create synthetic tokens that can track the price of just about anything.
- 1 What is UMA?
- 2 But why is UMA so important?
- 3 What are derivatives?
- 4 What does the UMA protocol do?
- 5 What are Synthetic Tokens?
- 6 How does UMA work?
- 7 The UMA Token Facility
- 8 Data Verification Mechanism (DVM)
- 9 How does the DVM work on the UMA?
- 10 What is the UMA cryptocurrency?
- 11 Wallets for UMA
- 12 Analysis of UMA . prices
- 13 UMA . road map
- 14 The Rise of Decentralized Finance
- 15 Uma price and forecast
- 16 Is it possible to buy UMA?
What is UMA?
UMA, short for Universal Market Access, is an Ethereum -based protocol that allows users to create custom synthetic tokens that can track the price of just about anything. To put it more simply, UMA allows you to trade any asset with ERC-20 tokens without any real exposure to the asset itself.
This allows anyone to access assets that would otherwise be out of their reach. The UMA token is used for protocol management and price oracle.
But why is UMA so important?
Because it opens up a world of possibilities for Decentralized Finance ( DeFi ). For example, you can place a DAI in the Compound for others to borrow, earning you a certain amount of interest per year. When you do this, you will receive DAI tokens that earn interest.
Since you can use almost any asset as collateral with UMA, you can use a DAI as collateral to mint synthetic tokens that represent, for example, the price of gold. You could then create a synthetic token that not only tracks the price of gold, but also earns 10% interest per year through the DAI that is locked. In order to properly understand UMA, we must first go through a few key concepts.
What are derivatives?
In finance, a derivative is a contract between two parties regarding an asset, where neither party needs to own or exchange the asset. Instead, a certain amount of collateral (usually a fiat) is exchanged on the day the contract expires, based on the current price.
In the old markets, derivatives are reserved for accredited and institutional investors because the procedural and legal framework for establishing and enforcing derivative contracts is incredibly complex and expensive.
What does the UMA protocol do?
UMA puts derivatives for the block of the blockchain . It creates a synthetic token for the asset when sufficient collateral is deposited. Then creates the terms of the contract for the issued token and enforces it using financial incentives.
Instead of using a price oracle to determine when a token issuer is underbought (not having enough funds to guarantee the tokens it issues as a result of a price change), UMA provides financial incentives to users of token issuers whose believe they are underbought, identify and liquidate them.
Strangely enough, UMA considers the use of oracles to be one of the biggest problems of the DeFi, mainly because they are prone to failure during “black swan” financial events (eg a sudden crash due to a virus) and because they are manipulated can become if enough money is put on the table to corrupt an oracle. Instead, UMA uses its oracle only to settle disputes related to liquidations (and such disputes are meant to be rare).
What are Synthetic Tokens?
Synthetic tokens can be quite difficult to understand. Fortunately, one page of the UMA’s detailed documentation gives what is probably the best definition: “Synthetic tokens are guaranteed [ERC-20] tokens whose value fluctuates based on the token’s reference index. Synthetic tokens are essentially derivative contracts on the Ethereum blockchain (or any other smart contract ).
These tokens have 3 characteristics:
- They have a price tag (refers to the price of an external asset)
- They have an expiration date (date when the contract is settled).
- They have a collateral requirement (which can vary, but must be at least 120% of the value of the tokens issued, e.g. to spend $100 in synthetic gold tokens, you would need $120 in locked cryptography as collateral).
How does UMA work?
While UMA is conceptually complex, its operation is surprisingly easy to understand. The core of UMA is formed by three elements: its framework for creating synthetic token contracts (read: derivatives) on the blockchain (Token Facility), its data verification mechanism (DVM, read: oracle) and its governance protocol.
The UMA Token Facility
Token Facility refers to the smart contract on the UMA that allows the creation of synthetic tokens as an asset. Anyone can create a smart contract under the token facility by defining the 3 attributes (price identifier, expiration date and compliance with the minimum guarantee requirement). The entity that creates the smart contract for synthetic tokens is called the “Token Facility Owner”.
At this point, any other user can join the smart contract to issue additional tokens by depositing collateral. These participants are called “token sponsors”. For example, person A (Token Facility Owner) creates a smart contract to create synthetic gold tokens and deposits the required collateral.
Person B (sponsor of the token) thinks this synthetic gold token could be valuable and wants to spend a few of his own, so he deposits collateral to spend more.
Data Verification Mechanism (DVM)
Unlike other DeFi protocols, UMA does not require a constant power supply for the protocol to work. That is why both UMA and its DVM are described as “priceless”.
In other protocols, such as Aave , oracles are used to liquidate borrowers if they are not sufficiently insured by constantly checking the price of their collateral (liquidations are often caused by a sudden drop in the USD price of their collateral). So how do you know if a synthetic token is properly secured in the UMA?
Rather than constantly checking the price of assets locked in as collateral, the UMA encourages its token holders to constantly check that the issuer of that token is properly guaranteed. To do this, they check the amount of collateral blocked in the smart contract (as everything is publicly visible on Etherscan of course) and then do a simple calculation to see if the collateral requirement is still met. If not, they (or anyone else) may request the liquidation of some of the issuer’s collateral.
The owner of the token facility can contest the liquidation request. He can then stake a bond (in UMA tokens) to become a contender and call on the DVM oracle to resolve the dispute by verifying the price of the guarantee.
If the DVM determines that the liquidator (the person who requested the liquidation) has made an incorrect request, the liquidator is punished and the dissident rewarded with this fine. If the dissenter makes a mistake, he or she loses his or her security and the liquidator obtains all smart contract security for that token.
How does the DVM work on the UMA?
UMA is more than aware that there is no rule of law in the world of cryptocurrencies. Because of this, many elements in it are subject to corruption, including oracles. To counter the possibility of corruption, UMA uses a simple yardstick: the cost of invalidating the oracle must always be greater than the potential profit that can be made from it.
What is the UMA cryptocurrency?
UMA is an ERC-20 token used to control the UMA protocol and to vote on the price of an asset when the DVM oracle is called to contest a collateral liquidation request.
Although the initial supply was $100 million, it has no strict limit and can be inflationary or deflationary depending on two elements: the amount of value currently in the protocol (since the more tokens there are, the more the token is purchased and burned), and the amount of UMA used to vote in the protocol (since there is an inflation rate of 5% of the tokens used to vote).
Wallets for UMA
The good thing about DeFi tokens like UMA is that, no matter how complex they are, it is always easy to store them, because almost all of them are ERC-20 tokens built on Ethereum. Because this is the best known and most widely used token, there is no wallet that does not support these tokens. That certainly works in favor of UMA.
So you can store your UMA tokens in almost any wallet that supports Ethereum tokens. You then have the choice between hot wallets and cold wallets. Popular cold wallets for the UMA tokens are Trezor and Ledger. These wallets are a lot safer than hot wallets, especially if you want to store large amounts of UMA. Popular hot wallets for UMA are Exodus, Atomic Wallet and of course Metamask, the popular web wallet used to communicate with DeFi protocols.
Analysis of UMA . prices
UMA has the same pricing model as most DeFi tokens. Shortly after its debut on Uniswap , the UMA token reached a price of around $1.50 USD where it remained until the end of July. So that’s pretty normal for DeFi tokens.
A few days after UMA introduced its “return dollar”, the price reached nearly USD 5, starting a parabolic race that ended at nearly USD 28. Since then, it has fallen back to about $20.
UMA . road map
It seems people didn’t pay much attention to UMA until less than a year later, in March 2019, it created a tradable token representing the 500 largest US stocks. At the end of 2019, UMA published its protocol that allows anyone to create a token that represents a real asset. In May 2020, UMA made headlines with the publication of its first “priceless” synthetic token, called ETHBTC, which tracked the performance of ETH against BTC .
Two months later, UMA unveiled a performance token called yUSD. Like a stable currency, the yUSD basically acts as a fixed-rate loan with a fixed maturity. Unlike USDT loans from a platform like Compound, where the interest rate is variable and the repayment term is indefinite.
While there appears to be no future roadmap for UMA, a listing on Coinbase is now imminent. This comes as no surprise given that Hart Lambur studied with Coinbase co-founder Fred Ehsram. Coinbase Ventures is also one of the first investors in the UMA project.
While it’s doubtful whether UMA can be considered a DAO (UMA’s documentation doesn’t seem to claim this at first either), UMA holders are the ones most likely to have the final say on the protocol’s direction. The fact that 14.5 million tokens are still reserved for future sales, along with the v1 designation of UMA’s DVM, suggests that UMA may have a lot more in store.
The Rise of Decentralized Finance
UMA is a pillar of Decentralized Finance. Essentially, UMA enables trading of financial assets outside of the traditional financial system, removing the need for a trusted third party to trade.
With trust in the traditional financial system crumbling at a rapid pace since the 2008 financial crisis, decentralized finance is a concept that is about to explode. The good news is that UMA is one of the major players in this field. Thus, the gradual transition of the world to decentralized financing should ensure that the UMA makes steady progress in the medium and long term.
Uma price and forecast
Is it possible to buy UMA?
If you’re looking to buy UMAs, the best options, unsurprisingly, are decentralized exchanges like Uniswap and Balancer . The best centralized exchange alternatives are Coinbase, OKEx and Poloniex. The liquidity of the latter two seems questionable, meaning you could still pay a premium to buy there due to the shallow depth of the order books.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com