What is UMA? Your ultimate guide
Confused about UMA coins? We are here to help by explaining what they are…
- What is UMA?
- How it works
- How synthetic assets are secured on UMA
- The UMA Protocol
- Who is behind UMA?
- UMA tokens
- What to do with UMA tokens
- UMA cryptocurrency wallet
UMA is a decentralised financial contracts platform that was built to enable Universal Market Access – hence the name – by creating synthetic assets based on the Ethereum blockchain. UMA was launched in December 2018.
Before getting into the ins and outs of UMA, there is some jargon you need to understand to make your journey easier. So-called "synthetic assets" are similar to traditional financial derivatives, which derive their value from other underlying assets, such as commodities, currencies, precious metals, stocks or bonds. They aim to achieve the same objectives as would be achieved by owning an asset, without the necessity of holding the actual asset itself.
What is UMA?
UMA allows users to design and create self-executing, self-enforcing financial contracts secured by economic incentives, running them on Ethereum’s blockchain.
It allows counterparties to digitise and automate any real-world financial derivatives, such as futures, contracts for differences (CFDs) or total return swaps. It also enables the creation of self-fulfilling derivative contracts based on digital assets, like other cryptocurrencies.
UMA builds open-source infrastructure for “priceless” financial contracts on Ethereum. Specifically, this refers to two things: priceless financial contract templates used to create synthetic tokens, and a so-called "decentralised oracle service", the Optimistic Oracle, which is used to manage and enforce contracts on UMA and to help settle disputes.
How it works
UMA offers priceless financial contracts: in other words, smart contracts that only require an on-chain price feed in the event of a dispute.
Economic guarantees and network incentives ensure those using the system – "network actors" in the jargon – will act honestly most of the time, but in the event of a malicious actor or a so-called "ad hoc market event", a dispute can be raised via UMA’s dispute resolution system, known as the data verification mechanism (DVM).
The five main "network actors" on UMA are called:
- token sponsors
- the data verification mechanism (DVM)
- UMA token holders.
How synthetic assets are secured on UMA
Token sponsors are individuals who lock collateral in a smart contract to mint synthetic tokens. They are responsible for making sure their positions always remain overcollateralised, or else their positions will get liquidated.
The value of the collateral in the smart contract is continually monitored "off-chain" by a robust network of "liquidators" who continuously monitor if a position is properly collateralised by referring to what are called "off-chain price feeds".
Disputers are incentivised to monitor contracts using UMA’s priceless financial contracts, while the DVM resolves the dispute by proposing a vote to UMA tokenholders to determine what the price of the asset was at a given timestamp.
If the "disputer" is voted to be correct, the DVM will reward the disputer and the token sponsor of the affected position. If the "liquidator" is agreed to be correct, the DVM will reward the liquidator, penalise the disputer, and the token sponsor will lose the funds in their position.
The UMA Protocol
The UMA Protocol gives smart contracts and decentralised autonomous organisations (DAOs) the same access to all forms of financial risk, opening up dramatic new applications for decentralised financial (DeFi) products.
The UMA Protocol promotes fair and open markets by removing all barriers to access for every financial market, allowing any individual, entity or DAO to access any type of financial risk, without any centralisation or single point of failure. It provides unrestricted access to short-selling, leverage, and what is termed "customised and bespoke risk" – that is, levels of acceptable risk tailored to individual users' needs.
The protocol uses novel systems and economic incentives to transparently and efficiently maintain collateral and accurately settle transactions while giving users complete control over the terms of their economic exposure.
The UMA protocol uses smart contracts on the decentralised Ethereum VM, or virtual machine, to implement what are called "self-policing margin accounts". This, its designers say, allows the UMA protocol to be fully "trustless" – that is, no trust is required in the other players, as any disputes will be fairly policed and decentralised.
Combined, these properties "enable and empower individuals to transfer financial risk, regardless of geographic location," say UMA's founders.
Who is behind UMA?
UMA was co-founded by Hart Lambur and Allison Lu. They met at Goldman Sachs, where Lu worked as a vice-president between 2009 and 2015 and Lambur worked as a government bond trader.
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, that is, the first product to run on the the main blockchain after testing on the testnet.
USStocks is an ERC-20 special token that tracks the top 500 stocks in the United States. These top US stocks allow crypto owners to invest in the US stock market.
After launching the protocol in 2019, the project gained more credence. But in 2020, UMA became popular when it created the first “priceless synthetic” token. UMA called the token ETHBTC, and it was to track the performances of ETH versus BTC.
After the synthetic token, the protocol developed its yield token, which UMA team called yUSD.
UMA enables users to use unique collateralised synthetic crypto tokens capable of tracking the prices of anything they want. In other words, members can trade assets of any kind using ERC-20 tokens, even without accessing the assets.
The total supply of UMA coins is a little over 100 million tokens. About 55 million UMA coins were in circulation as of October 2020.
From the total supply, two million UMA coins were sold during the project’s initial offering (ICO), 48.5 million were reserved for the founders of the project, 35 million were put aside as rewards for the developers of the protocol and 14.5 million were designated for future sales.
In order to incentivise voter participation, every time a voting process takes place on the network, an inflationary reward equal to 0.05% of the current UMA supply is distributed among active voters, proportional to their current stake.
Anyone searching for UMA tokens to buy can do so on Currency.com or other exchanges, but check liquidity and gas fees costs.
What to do with UMA tokens
The UMA token is primarily a governance token, which allows token holders to vote on so-called UMA Improvement Proposals (UMIPs) and on price requests made to the DVM through the voter "dApp", or decentralised application.
Those who vote with the majority consensus are granted 0.05% inflationary rewards for participating in governance and, the UMA team say, for "helping to keep our oracle secure."
UMA tokens are also accepted as collateral for minting Yield Dollars on the UMAnji platform from Machina Labs. UMA tokens are deposited as collateral to mint the yUMA21 token, which expires to exactly $1 on 31 December 2021.
Liquidity mining rewards are available for those who mint the token and use it to provide liquidity in the yUMA21/USDC liquidity pool on Uniswap.
Moreover, a call option gives the buyer the right (but not the obligation) to buy an asset at a specified price (strike) at a specific time period. Other options are then available for participants.
UMA cryptocurrency wallet
The 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.
The UMA Protocol provides smart contracts and decentralised autonomous organisations (DAOs) the same access to all forms of financial risk, opening up new applications for decentralised financial products.
The total supply of UMA coins is a little over 100 million tokens. About 62 million UMA coins are currently in circulation, up from 55 million in October 2020.
Anyone searching for UMA tokens to buy, can do so on Currency.com or some other exchanges, but check liquidity and gas fees costs.