UMA (UMA)

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A permissionless derivatives protocol establishing a generalized framework for creating synthetic assets on Ethereum.

Basics

  • "A decentralized, permissionless financial contract platform for developers to leverage its self-enforcing contract design patterns and provably honest oracle mechanism to essentially create any sort of financial product in existence with the ERC-20 standard."

History

"Populations in the developing world lack access to basic banking services or financial markets. The reason for this is simple. Financial markets require advanced institutional infrastructure, technology, education, and regulatory frameworks.

Seeing this problem, two former Goldman Sachs traders, Allison Lu and Hart Lambur, launched UMA in 2018. They recognized the Ethereum blockchain network as an excellent opportunity to create a protocol that replicates traditional financial products for the masses."

Audits & Exploits

  • Bug bounty program can be found here. Max payout is $25,000 (29-6-2020). Update: lowered the reward to 7.5K for most critical bugs (1-7-2021). Changed it once again to 10% of funds at risk (8-2022).
  • Blockchain Security DB (29-6-2020) shows 2audits. The latest was in 5-2020.
  • Scored a 85% on DeFi Safety (30-6-2021): "OpenZeppelin has done audits for all 4 phases of UMA as well as a continuous audit. They were done from April 28th 2020 to April 9th 2021. UMA was launched in December 2018."

Bugs/Exploits

Governance

Admin Keys

DAO

  • A thread accused UMA voters of not following oracle data, but following whales for 'the truth', since the 'true' outcome wins the inflationary rewards, therefore whales can determine this. Robert Leshner was named as a self proclaimed whale.
  • From The Defiant (5-10-2022):

"When UMA token voting takes place, it is usually discussed beforehand on the UMA Discord server, while Voter dApp is used for voting itself. Such voting proposals, dubbed as UMA Improvement Proposal (UMIP), range from emergency shutdowns and price disputes to approving new cryptocurrencies as contract collaterals.

Most importantly, if a corruption vector is detected, UMIP voting allows the protocol to grow more robust by tweaking the balance between rewards and sanctions."

Treasury

Tokens

IDO

"The derivatives protocol will deposit 2% of its token supply along with ~$535k in ETH into Uniswap available for the public to purchase. The sale, known as an “Initial Uniswap Offering” will officially begin at 15:00 UTC on Wednesday, April 28th.

With the launch of UMA’s Initial Uniswap Offering, we’re seeing the emergence of a new liquidity framework for privately funded DeFi projects. By using a permissionless liquidity protocol like Uniswap, projects can allocate a portion of their raise to bootstrap liquidity and anyone can participate in the sale. This helps projects distribute tokens to their community members. The only thing required for launching a new token on Uniswap is the capital to back it. 

With 100M UMA in total supply, the initial offering will value UMA at $0.26 per token with a diluted market cap of ~$26.67M –– UMA, short for Universal Market Access, is living up to its name with the low price point. As noted by Placeholder Partner and UMA investor, Chris Burniske, the offering is priced at the same valuation given to seed investors."

Token allocation

"UMA tokeholders who vote correctly (ie with the majority) in a dispute, recieve a proportionate share of 0.05% inflationary rewards that are minted with each dispute."

  1. Initial Uniswap Listing: 2,000,000 (2.0%)
  2. Future Token Sales: 14,500,000 (14.5%)
  3. Developers and Users: 35,000,000 (35.0%)
  4. Founders, Early Contributors, and Investors: 48,500,000 (48.5%) 

The last two come with lengthy lockups and vesting schedules.

Synthetic Tokens

"UMA introduced a service that lets anyone create synthetic tokens that track the price of real-world assets like stocks, or really anything at all that you have a price feed for. At the ETHBoston hackathon, hackers used UMA to create a synthetic asset that tracks whether DAI deviates from its dollar peg, resulting in a massive payoff if the peg breaks. At ETHWaterloo, the UMA team created a synthetic asset that tracked the amount of human fesces sightings in San Francisco, which they promptly integrated into a fork of Uniswap so people could trade it on testnet."

Utility

"The role of the token is to secure the collateral held in those contracts through the DVM. UMA also has a mechanism to turn on regular fees to facilitate a buy back and burn mechanism should the oracle's security be threatened with a 51% attack. This mechanism has never been activated. "

  • From their docs (6-2022):

"The UMA token is an integral part of the UMA ecosystem as it guarantees the economic security of UMA smart contracts and its oracle system. The objective of the UMA token is to enable the optimistic oracle to remain secure utilizing a fully decentralized and permissionless method.

UMA's DVM is designed with an economic guarantee around the cost it would take to corrupt the oracle and the profit someone would receive. The DVM ensures the price to obtain 51% of UMA tokens is greater than the profit from corrupting the DVM, as measured by the collateral stored in UMA's financial contracts. This is achieved through an inflationary reward (currently 0.05% of total network token supply), distributed pro-rata by stake to voters who participate and vote correctly. As long as there is an honest majority, voters will vote correctly.

As the total value of collateral locked in UMA grows, the UMA token is required to increase in value to ensure the security of the DVM. To ensure this inequality holds, the DVM may charge fees to financial contracts which the DVM would use to buy UMA tokens."

"UMA token utility falls into three main buckets:

  1. Governance: Users can earn inflationary rewards by participating in governance
  2. Disputes: Tokens are used to properly incentivize price requests during disputes
  3. Burns: All financial contracts using UMA pay a tax that’s used to buy and then burn the token, driving value to UMA and scaling economic guarantees as protocol activity increases

The primary purpose of the UMA token is for governance and voting on UMA Improvement Proposals. Users who elect to be active governance participants and vote with the majority will receive inflationary rewards in the form of UMA. More details on the UMAIP Process can be found here.

Another important use is for price disputes. To ensure the safety and security of oracle-minimized financial contracts, the profit from “attacking” the contract (known as profit from corruption, PfC) must be less than the cost of the attack (known as cost of corruption, CoC). Given UMA tokens are used for voting on price disputes, the cost of corruption of an UMA contract is calculated as the value of 51% of all UMA tokens. 

As more value is locked in UMA contracts, the potential profit from corrupting the underlying contracts rises in tandem. That said, in order for UMA to scale, the network relies on proportional growth in the value of UMA tokens to ensure economic guarantees.

The protocol drives this dynamic by embedding a small protocol tax on all of UMA’s financial contracts. The tax is then used to buy-back and burn UMA on the open market. Therefore, the more value locked in UMA, the more revenues generated from the tax, and in turn, the more value accrues to the token."

Stablecoin

"uUSD is a “yield dollar.” The yield dollar model is described here and the first iteration UMA pursued was based on ETH, which resulted in over 10mm in minted yUSD. In partnership with UMA, we will be pursuing the same concept but with renBTC."

Coin Distribution

"In charge of UMA protocol is the Risk Labs Foundation, run by CEO and co-founder Hart Lambur, with Allison Lu co-founder as the only employee. When they launched UMA tokens, they initially minted 100M UMA. Out of that, 48.5M UMA are in the hands of Risk Labs founders.

For dApp developers that have integrated the UMA protocol, Risk Lab allocated 35M UMA. On a weekly basis, this amounts to 50,000 UMA distributed to teams who use UMA to mint synthetic tokens on their dApps.

The rest of the UMA pile, 14.5M, is reserved for future funding via token sales. As of September 2022, 68% of UMA tokens are in circulation."

Tech

  • The platform features two core components: a decentralized oracle (DVM) and a financial contract template.
  • Whitepaper of UMA can be found here (3-12-2018). And of the DVM here (24-4-2020).
  • Capacity (TPS):

How it works

"Any ethereum wallet can propose an answer to any answer request by putting up a bond to the oracle. Any wallet can dispute that answer by paying a disputer bond. If a period (known as the liveness period) expires without dispute, the answer is accepted, and the data put on-chain. If it is disputed within that period the conflict is resolved by escalating to the DVM where UMA tokenholders vote on the correct answer in a 48h commit/reveal cycle, at which point the answer from the DVM is put on chain. If the proposed answer is upheld, the proposer receives their bond back + a portion of the disputer bond, if the proposed answer is not upheld, the disputer receives their bond back + a portion of the proposer bond."

"The key UMA network actors are sponsors, liquidators, and disputers. As their names imply, sponsors are in charge of creating synthetic tokens, liquidators handle liquidations, and disputers initiate voting and probe liquidators’ decisions. The protocol’s UMA tokens represent the voting power, proportional to UMA holdings."

"In short, anyone can create a token pegged to an underlying data point so long as that data point is reliable and that token is sufficiently overcollateralized using ERC20 tokens like ETH, DAI and USDC.

To paint a clear picture, someone could use UMA to create a token that reacts to DeFi’s TVL – effectively allowing some to go long or short on Total Value Locked over a fixed period of time.

Furthermore, UMA allows for the creation of priceless synthetic assets – or those which mitigate oracle risk by either being sufficiently collateralized or not."

"UMA offers users to create derivatives called Total Return Swaps. Let’s say you want exposure (i.e. owning the cash flows from price movements) to Bitcoin on Ethereum. In this case, you can use UMA to create an agreement where you pay another user DAI when the price of Bitcoin decreases and the other other pays you when it increases.

Unlike Synthetix, UMA therefore needs two parties involved. Both need to lock some tokens to guarantee their future payments to the other party. However, neither of the two parties needs to lock the $5000 to guarantee payments on Bitcoin’s price movement. A smaller amount of collateral is enough to pay the respective other party on price movements. Therefore, both parties are leveraged with a small amount of committed money while fully participating in Bitcoin’s price movement.

In fact, UMA even allows you to define the exact terms of how price movements influence your payments: Maybe each party only pays when Bitcoin’s price moves more than $100. As long as you have an oracle for it (i.e. have some way to provide the price information to UMA’s smart contract), you can also create agreements on other assets, such as stocks or indices. As long as you have a counterparty who wants to take the exact opposite side of your outcomes, you can use your UMA token as investment.

One extreme example of how a UMA token can be set up shows the approach of creating a USStocks token. In this case (see their blog post), one side collateralized the position, not partly, but to always more than 108.5% of the values of that US stocks. Buying this token, a user can therefore always buy this stock token to gain exposure to the US stocks market in a 1:1 fashion."

That’s actually similar to buying a similar token on Synthetix, only that UMAs synthetic derivatives also have a fixed time. Synthetix tokens are perpetual. As briefly mentioned above, UMA relies — just like Synthetix — on Oracles to receive the Bitcoin price — or any other value of your desired underlying."

Fees

Upgrades

Staking

Liquidity and Developer Mining

"UMA plans to allocate 50k tokens per week to developers who build synthetic assets on its permissionless derivatives protocol starting on November 10th. At the time of writing, this equates to roughly $325k worth of weekly rewards. The program is set to distribute up to 35% of the total token supply to focus on those building on the protocol, rather than simply aggregating liquidity. UMA’s liquidity mining program attracted $52M in TVL at its peak.

Rewards are weighted by the value locked in each synthetic asset contract, meaning the more TVL a synth attracts, the greater share of UMA tokens the creator will receive. Creators can design their own liquidity mining programs using UMA rewards. Incentives are determined at the contract deployment level, ensuring that only creators who are verified on a whitelist are eligible for rewards. The verification process is meant to “discourage non-productive products, such as ones that might be designed to soak up rewards but with no actual utility or transfer of risk,” according to the post." 

"UMA rolled out not one but two of these special protocol programs.

The first was UMA Developer Mining which launched last fall. It’s currently distributing 50,000 $UMA tokens (1 $UMA = ~$25 currently) every week to devs who publish synthetic asset products via UMA. That’s over $1.25M every week in rewards!

Even more recently, the team launched UMA Talent Referral Options, which are tokenized talent referrals that payout $UMA rewards depending on if referred candidates complete interviews for UMA, get hired by the protocol, and so forth."

Scaling

Different Implementations

Interoperability

Other Details 

Oracle Method

"UMA offers a price oracle system upon which these synthetics contracts are built, generally used at redemption/expiry of options. Voters vote on prices to update these oracles. The protocol has seen 103 such oracle requests to date. Over time 92 different voters have contributed to these price oracles."

Data Verification Mechanism (DVM)

"The UMA team have published a new paper last week introducing the concept and design for an oracle construction, called a Data Verification Mechanism (DVM), that guarantees the economic security of a smart contract and oracle system in a fully decentralized and permissionless blockchain setting by ensuring that the cost of corruption is always greater than the potential profit available via bribes."

"UMA tackles the oracle problem by minimizing the reliance on on-chain price feeds and incentivizing participants to properly collateralize their positions at all times. If there’s ever a dispute on what the proper collateralization ratio is, UMA token holders are incentivized to step in and accurately resolve the dispute. More on this in the next section. If you’d like to get a deeper understanding of the DVM, you can read up on the DVM whitepaper here." 

Optimistic Oracle

"UMA’s Optimistic Oracle is live now. It can be used to resolve markets and bring all types of data on-chain. It is not limited to use only for UMA financial contracts, but can be “plugged into” by any DeFi protocol.

In the happy path, a contract requests a price and specifies a dispute period (which can be as little as a few minutes, or as long as a few days). The proposer posts a bond and proposes a price—and no one disputes this price. After the dispute period passes, the data is finalized and the proposer gets their bond back. The whole thing is fast and cheap.

The unhappy path differs in that a disputer disagrees with the proposed price. The disputer posts a bond equal to the proposer’s bond and escalates the dispute to UMA’s Data Verification Mechanism (DVM). UMA token holders resolve the dispute over a 48 hour period. If the disputer is correct they earn the proposer’s bond as a reward; if the disputer is wrong, they lose that bond as a penalty that goes to the proposer.

The system is optimistic because disputes are designed to be very rare. UMA contracts have been operating optimistically over the past year (through some intense crypto volatility!) and we have only seen fewer than 5 legitimate disputes. This optimistic concept has been proven in production."

Privacy Method

Projects

"UMA is an optimistic oracle. It is comprised of two parts, the Optimistic Oracle and the DVM which secures it. We also have a number of template smart contracts that can be used to build contracts on UMA. One example is the Long-Short Pair (LSP), and we used to also have the Expiring Multiparty Contract (EMP) which is now depreciated."

Shitcoin

"UMA Protocol creates an actual Shitcoin. The ERC-20 token tracks poop sightings in San Francisco and allows the token to accrue value based on how much poop is reported."

BitDEX

“BitDEX: Building a Decentralized BitMEX with Priceless Financial Contracts”

Later on retracted saying "The UMA Protocol team is not building BitDEX but they hope to inspire other developers to take on this challenge with the published specification.". There is a lot more info on the specifications of the project in the link.

 Degenerative Finance

Priceless Financial Contract Designs (PFCD)

"Let’s say a trader wants to use UMA to create a futures contract for silver as the underlying asset. These types of contracts, typically traded via CME Group exchange, are binding agreements to sell or buy commodities/securities at a given price point in the future. Because futures have expiration dates, investors use them against depreciation or appreciation, depending if the trader locked the price for selling or buying.

UMA’s Priceless Financial Contract Designs (PFCD) makes it possible to create such contracts in a user-friendly way, generating synthetic tokens that represent traditional derivatives. PFCD uses smart contracts to bind both parties and lock their funds, which are released or liquidated until conditions are met.

To prevent liquidation, synthetic tokens are over-collateralized to safeguard against crypto volatility. Users can create synthetic tokens in the following steps:

  1. Deposit a collateral for a new synthetic token, typically ETH or DAI.
  2. Create a price identifier, determined by UMA token holders, to track the underlying asset’s price.
  3. Set the contract’s expiry date.
  4. Mint synthetic tokens, following Ethereum’s ERC-20 standard.

Once created, synthetic tokens can be put into circulation on a number of dApps for trading.

To resolve potential price disputes of underlying assets, UMA’s Decentralized Oracle Service consists of two parts — Optimistic Oracle Service (OOS) and Data Verification Mechanism (DVM). "

Range and Success Tokens

"Range tokens can be incredible tools for treasury diversification as it is an on-chain option that is customizable for DAO needs. Success tokens are a new incentive-aligned way for VC funds to effectively invest in a “Series B” for DAOS. UMA is working closely with teams, and is also organizing leads from VCs interested in taking the other side of these deals."

"Range Token: DAOs can borrow using their native token, via convertible debt-like instrument constructed using put and call options."

Roadmap

"The first product available with UMA will be priceless synthetic tokens on Ethereum, which will launch in the coming weeks." 

Usage

  • Total data requests from UMA oracles in 2 years time has been 286 according to Dune (12-10-2022).
  • From Our Network (21-8-2021):

"UMA’s TVL grew 44% in the past 30 days as the team rolled out a number of new products, including range tokens and success tokens. Over 60 projects have launched using UMA. The number of UMA tokenholder addresses surpassed 12K, reaching all time highs."

Projects that use or built on it

"UMA provides tools for devs to create their own synthetics contracts. In Nov 2020, they launched a program to incentivize devs to build on top of UMA. To date, 85 products have been created using UMA, many of which are still active or hold value. This growth started to uptick in March 2021."

"Opium [will] plug into UMA's Optimistic Oracle product to provide financial derivatives for hedging risks related to SpaceX flights."

Pros and Cons

Pros

Cons

  • A thread accused UMA voters of not following oracle data, but following whales for 'the truth', since the 'true' outcome wins the inflationary rewards, therefore whales can determine this. Robert Leshner was named as a self proclaimed whale.

Competition

Team, Funding, Partners

Team

"In charge of UMA protocol is the Risk Labs Foundation, run by CEO and co-founder Hart Lambur, with Allison Lu co-founder as the only employee. When they launched UMA tokens, they initially minted 100M UMA. Out of that, 48.5M UMA are in the hands of Risk Labs founders."

Funding

Placeholder, Bain Capital, Blockchain Capital, Two Sigma Ventures, Box Group, Dragonfly Capital, Coinbase, Fintech Collective

"Risk Labs (the foundation supporting UMA) has minted the first ever Range Token backed by UMA collateral. $2.6mm worth of this token has been sold to a small group of DeFi enthusiasts, including Amber Group, BitDAO, Blockchain Capital, Robert Leshner and Wintermute Trading."

Partners

"uUSD is a “yield dollar.” The yield dollar model is described here and the first iteration UMA pursued was based on ETH, which resulted in over 10mm in minted yUSD. In partnership with UMA, we will be pursuing the same concept but with renBTC."

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