UMA

Overview

UMA — short for Universal Market Access, is a decentralised financial contract protocol built on top of Ethereum. It allows users to create synthetic assets and allow any two parties to create financial contracts.

UMA allows users to trade any asset using ERC-20 tokens without interacting directly with the asset itself.

Rating

AAA AA A style

Value-add

Why is UMA valuable?

UMA builds open source infrastructure for “invaluable” financial contracts on Ethereum, which include:

  • Invaluable financial contract designs can be used to create synthetic tokens (synthetic tokens). Rather, these DeFi contracts can minimise oracle use, avoiding security and scalability issues affecting DeFi.
  • Data Verification Mechanism (DVM), a decentralised oracle service like Chainlink and Band. DVM does not provide on-chain price data, it is only used to settle liquidation disputes and resolve synthetic token contracts upon expiration.

These two technologies allow for the faster, more efficient and secure creation of synthetic derivatives on the Ethereum blockchain.

Objectives

Objective 1: Allow user create synthetic assets

 

Constraints

  • UMA’s main competitor is Synthetix with similar functions.

Potential Solution

  • Using ETH’s platform to hedge the risks of other assets, including blockchain’s cryptocurrencies and off-chain world.
  • Such as the need to use the synthetic asset as a derivative tool to increase profits or hedging. The parties involved are hedgers, speculators, liquidity providers will make the platform grow.

Token High-Level Summary

Token Summary

$UMA is a native token to the Governance Token. It allows holders to govern the system. There is a total supply of 100,000,000 $UMA in the market.

Usage

Price requests When contract interactions are disputed, owners of $UMA tokens are responsible for voting on price requirements through the Data Verification Mechanism (DVM). Participants who correctly vote on a given dispute now earn an inflation reward of 0.05% of the total network supply distributed in proportion to the stake.

Governance UMA token holders play a role in two areas of the system: financial contracts depending on DVM and UMA DVM. Token holders have a say about what types of contracts access the system, what assets are supported, and core system parameters and upgrades. All governance issues are resolved through the “Proposed UMA Improvement” (UMIP) process.

Distribution

Allocation

Ecosystem

Digitally Native Index:

  • Degenerative: The uGas token being managed by the YAM team in collaboration with UMA. Build for Degens.
  • Domination Finance: Tracking the total market share that Bitcoin has over the total market share of cryptocurrencies.
  • Mario Cash: A Bitcoin Cash synthetic token backed by renBTC.
  • Zelda Cash: Synthetics on the stability of Ethereum versus non-Ethereum stablecoin baskets.

Synthetic Asset

  • Jarvis: A set of protocols allowing anyone to become a broker by funding and maintaining liquidity pools with stablecoins, against which anyone can gain exposure to the price of any traditional or digital assets.
  • Perlinx: Democratising the trading of real-world assets through decentralised liquidity pools and synthetic asset generation.

Yield Dollar

  • Ren Protocol: Permissionlessly leverage BTC/ETH to generate UMA’s Yield Dollars.

UMA in DeFi (Products)

Currently, UMA Protocol has 3 main products:

  • Digitally Native Index
  • Synthetic Asset
  • Yield Dollar

Market Design

Design of the environment in which the tokens and users exist in

Thickness of Market

Currently the derivative market is the largest with a total market capitalisation of approximately $ 524 trillion according to data from the Bank for International Settlements (BIS).

Source: Swap.Rate

The market in Crypto space is growing strongly, especially in 2020. Currently, the market cap of the blockchain derivative market is at $ 2.7 Billion and continues to grow, peaking at $ 3.5B on 13 February, 2021.

And leading the way with Synthetix Protocol with TVL reaching $2.3 Billion, And is leading the way with Synthetix Protocol with TVL reaching $ 2.3 Billion, 83.38% market share and considered a direct competitor to UMA Protocol.

Source: defipluse.com

UMA’s goal is to give anyone access to the financial markets, and UMA aims to be a derivative market that is worth between $500 Trillion and over $1 Trillion.

Currently, UMA Protocol has TVL reaching over $ 93 Million, peaking on 22 February 2021 at $ 111.86 Million.

Source: defillama.com

Reduce Congestion

UMA is a decentralised synthetic asset issuance protocol built on Ethereum. To create a new Synthetic Token, the user has to take out collateral and assets are locked in the platform.

UMA only use Oracle when it has a disputed event, which means it helps users to save money and against the wrong Oracle.

Previously, the project had problems with its oracles, and the foundation suffered an attack and over 37 million ETH were taken away. However, now the problem seems to have been resolved.

Safety

Audit

  • Phase 1 – OpenZeppelin

    Date: April 28, 2020.

    Phase 1 of the OpenZeppelin audit revealed twenty-nine issues ranging from high-severity to low-severity. All issues listed in the audit have been fixed or accepted by the UMA team.

  • Phase 2 – OpenZeppelin

    Date: May 12, 2020.

    Phase 2 of the OpenZeppelin audit revealed twelve issues ranging from high-severity to low-severity. All issues listed in the audit have been fixed or accepted by the UMA team.

Bug Bounty

UMA offers substantial rewards for discoveries that can prevent the loss of assets, the freezing of assets, or harm to users.

Get 20% OFF On Our Book

USE CODE “REPORT”

Mechanism Design

Rules of the game that people have to follow

Governance

1. Decision Making

The primary purpose of $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 0.05% inflationary rewards in the form of UMA.

$UMA holders govern two areas of the UMA ecosystem:

  1. Financial contracts using the DVM
  2. The UMA DVM

2. Resolution mechanisms

Wrong Price Requests

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

Wrong Dispute

When the system has a disputed event, the Data Verification Mechanism will resolve it by proposing a vote to $UMA holders to obtain the price of the asset at a certain time. If it is different from the price of the Disputer and Sponsor, they will lose the funds in their position.

Forced Liquidation

the collateralisation ratio is important for UMA protocol, if this ratio is too low, it will damage the whole system. Therefore, if the collateralisation ratio for any token sponsor’s position does reach below 100%, UMA will liquidate these positions uneconomically.

Non-Finance Incentive

1. Voting Protocol

Governance Protocol

Each UMA token represents 1 vote. If at least 5% of all tokens are used to vote, of which >50% of voters approve the UMIP, the UMIP is considered approved.

$UMA holders vote on UMIPs every Thursday or Friday of the week (depending on which day the committed period falls).

DVM Voting

The relative weighting of votes is determined by how many Vote Tokens each participant holds.

2. Allocation mechanism

DVM guarantees value to get 51% $UMA greater than TVL of UMA protocol.

Currently, 51% of the market cap of $UMA is $ 635,915,720 while the TVL is $ 95,616,793.

Market Structure

1. Bargaining Protocol

Sponsor

The person who created synthetic token by locking the collateral in smart contract.

They are responsible for making sure their positions always remain overcollateralised or else their positions will get liquidated.

Liquididator

Liquidators monitor if a position is properly collateralised. Liquidations can be configured to automatically search for positions to liquidate (through Liquidation Bots) or manually by anyone holding the synthetic asset and collateral currency of the position they are liquidating.

$UMA Holder

$UMA holder will confirm the exact price of the asset.

When there is a dispute, UMA holders will reference off-chain price feeds to report price information to the DVM (mention below).

2. Priceless Contract

These contracts is not used an on-chain price feed to function and mnimise on-chain oracle usage to reduce the frequency and surface area for oracle attacks.

Disputer

Disputer can be a Bot or executed manually.

If a position is liquidated by a liquidator bot there will be a 2-hour delay before the liquidation is finalised. During this time, Disputers are incentivised to monitor contracts using UMA’s priceless financial contracts and assess whether the liquidation price is reasonable.

Data Verification Mechanism (DVM)

DVM is an UMA’s oracle. DVM’s purpose is to provide prices for the asset. DVM provides these prices for financial contracts, which are smart contracts that need the price of the asset and have an amount depending on that price.

In the event of a dispute, a price request is submitted to the DVM which proposes a vote for UMA holders to report what the price of the asset was at a specific timestamp. UMA holders will reference the price identifier’s UMIP to determine the price of the asset via off-chain price feeds and record the price of the asset via UMA’s Voter dApp. The DVM will then aggregate votes from UMA holders to determine the final price of the asset for a given timestamp.

The liquidated position will be pending until it is resolved by the DVM (48-hours later).

Store Contract

The Store contract helps contracts compute their fees and collects those fees from contracts. The Store’s funds are to be used to buy back and burn tokens. Right now, the funds can be withdrawn by the contract admin to do this offchain. In the future, this buyback may be accomplished on-chain as a part of the contract logic.

Token Design

Rules of the game that tokens have to follow

Token Policy

1. Monetary Policy

$UMA Token

Owning $UMA gives holders the ability to contribute price information to the DVM and govern UMA protocol.

When TVl is incremented in UMA protocol the value of $ UMA must be increased to protect DVM as well. This ensures that the costs to damage the system outweigh the benefits.

2. Token Valuation 

$UMA Valuation

DVM ensure the value from 51% of the UMA token is greater than the profit from damaging the DVM, as measured by collateral stored in the financial contracts registered with it. At the same time, DVM may charge fees together with financial contracts which DVM will use to buy back $UMA.

Basically, the more financial contracts that are allowed to operate, the more fees will be collected. And the amount of these financial contracts depends on the TVL of the protocol.

Financial Incentives

1. Platform Activities 

DVM’s Revenue

To pay for DVM, financial contracts have to pay a fee for the Store contract. The Store has charging methods and those that allow the contract to calculate the required payment. There are two types of fees:

  • Regular Fee: a recurring fee based on the amount the contract is holding.
  • Final fee: a flat fee paid for all pricing requests.

Incentives of $UMA holder

  • Earning rewards for voting on price requests from financial contracts using the DVM
  • Earning rewards for governing the UMA ecosystem by voting on parameter changes and approving system upgrades

The voters who participate and vote correctly will earn an inflation reward (currently 0.05% of the total supply of network tokens), allocated in proportion to the stake.

Incentives of Sponsor, Disputer and Liquidator

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.

Dispute event take place exactly, Disputer and Liquidator will get rewarded by DVM. If not, the Liquidator receives a reward by DVM (up to 100% Sponsor’s collateral), the Disputer and the Token Sponsor will lose the funds in their position.

2. Financial Returns

Buy Back and Burn

The protocol promotes this dynamics by embedding a small protocol tax in all UMA financial contracts. Then, taxes are used to buy back and burn UMA on the open market. Therefore, the more value that is locked in the UMA, the more tax revenue and, therefore, the more value will accumulate for the token.

Token Architecture

Useful for non ERC-20 tokens. And how financial products are structured.

Token structure

Synthetic Tokens

The synthetic token is a collateral backed token whose value fluctuates depending on the token’s reference index.

This token has 3 main parameters:

  • Token’s price identifier (the price feed this token should track).
  • Token expiration timestamp.
  • Token collateralisation requirement.

Vote Token

Each price request (Data Verification Mechanism Section) from a financial contract must be voted on by the Vote Token.

The Vote Token is a simple ERC20 contract whose ownership allows a voter to respond to price requests.

Token distribution

Expiring Multi Party (EMP) Contract

The EMP allows token sponsors to mortgage their positions with a specified collateral currency. Whenever the EVP expires, any aggregate token holder can redeem their tokens for the payout value, calculated in the collateral currency, and fixed by the price. of the EMP contract’s token identifier at the expiration timestamp. The price for determining the payment value is determined by DVM.

Voting Contract

The voting contract maintains a whitelist of identifiers (price feeds) for which financial contracts may require price. This list is currently controlled by voters.

After the request is received, polling time begins. Voters follow a typical commitment disclosure cycle to deliver their votes to the Vote contract.

After the voting period ends, the contract will reward the voters who voted with a majority by casting them new tokens corresponding to their percentage of votes. Voters who do not vote or vote incorrectly will not receive newly minted tokens.

The voting contract uses the Registry to confirm whether a financial contract is allowed to make a price requirement.

The Registry maintains two lists:

    • Approved contract creators: these contracts have the right to register new financial contracts in the Registry.
    • Approved financial contracts: these have been registered by an approved contract creator and are allowed to make price requirements for the Voting contract.

Conclusion

Maybe UMA is providing a stable and secure mechanism. For DVM, it is only allowed to create additional synthetic assets when 51% of the market cap of $ UMA is greater than Total Value Locked in Protocol, which will cause the hacker to have a greater cost compared to the benefits received.


Second, the mechanism only uses Oracle when there is a dispute, which saves on fees and prevents Oracle failures. And the parties can participate in dispute events that include the Sponsor, Disputer and $ UMA holder and they have opposing incentives, one receiving the reward and the other losing money. This should be observed, but generally this encourages the parties to limit disputes and adhere to fairness.


In terms of monetary policy, UMA Protocol currently only issues $ UMA through inflation. The increased demand for the product will increase the value of $ UMA.


In short, UMA Protocol is currently a different control protocol from its rival, Synthetix, but they are all aiming for the same purpose. We can see the other projects cooperating with UMA Protocol, TVL growing rapidly. Expect to have opportunities related to this protocol.

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