The boom of decentralized finance (DeFi) in 2020 resulted in the value of the locked assets surpassing a whopping $9 billion. A number of projects that are part of this space have broken the rules of the traditional finance system and have implemented technologies that were previously not considered plausible. While there are a number of projects that have experienced rapid growth in the DeFi world, one project that’s worth checking out is known as UMA (Universal Market Access). This is basically a DeFi open-source protocol that was developed by Risk Lab.
The Universal Market Access (UMA) platform works with financial contracts based on the Ethereum blockchain and also supports the development of synthetic assets on the Ethereum network. These assets are a combination of crypto-based assets.
How Does UMA Work?
Infrastructure (open-source) is provided by Universal Market Access (UMA) which lets DeFi developers create their synthetic derivatives and tokens in the Ethereum network, which can be used for keeping track of the prices of different assets. There are two aspects in which financial contracts made on the Ethereum blockchain can be summarized; an Oracle service and asset creation.
There are two main components that are provided by the UMA protocol for these financial contracts and these are UMA’s Oracle Design and Priceless Financial Contracts.
- UMA’s Oracle Design: The Data Verification Mechanism (DVM) or the Oracle is a mechanism that the protocol uses, along with a number of other DeFi services, for smart contracts or reporting off-chain data to the network.
- Priceless Financial Contracts: These refer to the contract templates that can be used for developing synthetic assets based on Ethereum (ERC-20). An on-chain price feed is not required for these contracts to function. Meanwhile, they are also helpful in reducing the surface area and frequency of oracle attacks.
The primary focus of the UMA protocol is to provide developers with an open-source infrastructure and create ‘priceless’ derivatives on the Ethereum network. There is not such a need for an on-chain price feed because these financial contracts provide counterparties with an enhanced and secured collateralization. Every time an improperly collateralized position is identified by a user through a dispute and liquidation process, these contracts will be able to figure them out by taking advantage of the Data Verification Mechanism. Similarly, rewards are given to counterparties when they highlight these improper positions.
The only time oracles will work is when there is a liquidation dispute. When a position is solvent, it is considered ‘properly collateralized’.
Who Developed UMA?
Allison Lu and Hart Lambur are two traders and the brains behind the Universal Market Access (UMA) protocol. These two computer scientists had a great deal of experience and they had begun working together on the Goldman Sachs trading floor back in 2008. Lu and Lambur had started exploring different ideas for blockchain-based solutions for problems that exist within the traditional financial services and products in 2017.
It took some research for the two to realize that people all over the world could get Universal Market Access through blockchain-based financial contracts, which is quite similar to how HTTP enables information to move across borders. The community and the full-time has continued to expand since then.
What is UMA Token?
The native asset of the DeFi protocol, which powers the oracle and keeps it functioning is called the UMA token. It provides developers with price and governance requests. UMA holders are permitted by the protocol to decide the kind of contracts that can be accessed on the platform, the assets that can be supported, and also choose the future upgrades and vital parameters of the system. Apart from that, token holders are also free to use the Data Verification Mechanism for addressing price requests, when a contract is being disputed by counterparties. On-chain price requests are reduced by this methodology, but it doesn’t eliminate them completely.
In addition, UMA holders can also vote when a price request is submitted by a user for earning rewards from financial contracts. This allows them to contribute to price information to the Data Verification Mechanism and have a more active participation in the governance of the protocol. Voters are given 0.05% of network supply as a prize in staking pools. Voters not participating will be penalized by the system, especially if they have been inactive for a certain time period. Furthermore, the value of UMA goes up as the total value of locked tokens grows.
While there may be changes in the distribution mechanism, the current plan for the UMA tokens is as follows:
- 2 million UMA tokens will be added to Uniswap’s liquidity pool
- 14 million tokens have been reserved for future sales of the token
- 100 million UMA tokens will circulate in the market
- Developers and users of the protocol will receive around 35 million tokens
- Risk Lab founders, contributors, and investors will keep around 14.5 million UMA tokens.
Plans and proposals for the community will be outlined by the protocol in the future so that they can choose which mechanism would be the most suitable.
Pros and Cons of the UMA Protocol
The constant innovation is the primary advantage of the UMA protocol. Risk Labs had introduced the KPI Options, which is an incentive for communities growing in DeFi platforms. Importantly, these are synthetic tokens that boast an expiry date. If the KPI reaches a certain target, the users will receive higher rewards from the assets. Hence, they will work as an incentive for growing communities because the value of the asset will go up over time.
It should also be noted that storing UMA tokens is quite easy. As opposed to the rest of the DeFi protocols, UMA comes with an incentive for uniting the community and can be helpful in developing a better system. The fact that only 2% of the total supply is available for trading has been considered a downside of the UMA protocol by some people.