Hey crypto nation, it’s Layah Heilpern here with Exodus.
We’re going to pop the lid on UMA, the Universal Market Access project seeking to bring derivatives
to Ethereum so that anyone, regardless of where they live, can trade the financial instruments
they want to.
Let’s dig in and answer the question, What is UMA?
To understand UMA, you must first understand what derivatives and synthetic assets are.
Derivatives are contracts between two or more parties about an asset’s price movements.
The attraction about derivatives is that it gives investors exposure to an asset without
actually having to hold the asset.
Examples of derivative products are options, futures, collateralized loans and prediction
markets, which let investors interact with assets such as bonds, stocks and currencies,
without having to actually own or exchange any of them directly.
Because of complex legal frameworks and regulations, derivatives are traditionally restricted to
accredited and institutional investors.
But UMA is set to change all this, by bringing the derivatives market, worth up to over 500
trillion dollars, to the decentralized world via the Ethereum blockchain.
An open source, financial contracts platform, UMA aspires to allow anyone to create collateral-backed
synthetic assets in a permissionless and trustless way.
Imagine a future where assets can be designed and created to track the price of anything,
including real-world assets such as gold, the or global stocks such as Tesla or Amazon.
We´re not there yet, but UMA is poised to be a first mover as the protocol continues
to grow and become more decentralized.
Like derivatives, UMA lets investors interact with collateral-backed synthetic tokens, make
bets and profit on their predictions, but all in a decentralized environment on the
Ethereum blockchain.
UMA is developed by , whose mission is to provide anyone with a smartphone and Internet,
equal access to the financial derivatives market.
And hence, Universal Market Access.
Risk Labs is co-founded by Allison Lu, a former Vice President of Goldman Sachs and Hart Lambur,
a former professional trader at Goldman Sachs.
Top UMA investors include BainCapital Ventures, Two Sigma Ventures, Coinbase Ventures, Box
Group and Dragonfly Capital.
This is how UMA works in a nutshell:
- The price of a reference asset is identified - Smart contract terms are created with an
expiration date - Sufficient collateral is deposited
- Synthetic token is created - Positions are secured using financial incentives
Let’s take an example of Alice and Bob, and the price of potatoes, to more easily
understand how this works.
Bob thinks that the price of potatoes will increase in three months, while Alice speculates
that the price of potatoes will go down during the same time period.
Alice and Bob then enter a bet in the form of a smart contract agreement.
As a deposit, they both provide a 10 percent margin.
Over the months, the price of potatoes drops.
Bob has to cover his margin position by depositing more funds according to how much the price
has fallen.
At the end of three months, the price of potatoes has fallen further by 30 percent.
Alice wins the bet and the smart contract is automatically executed and settled in Alice’s
favor.
To ensure the integrity of its financial contracts, UMA has two mechanisms working behind it:
Priceless Financial Contract Designs and a Data Verification Mechanism (DVM).
Priceless Financial Contract Designs creates self-executing, self-enforcing financial smart
contracts.
DVM is a decentralized off-chain oracle that uses financial incentives and voting to value
and secure these financial contracts.
Other protocols like Synthetix rely on price oracles, which are on-chain price data feeds
to determine proper collateralization.
Instead, UMA financially incentivizes its community to identify and ensure that token
issuers, also called sponsors, are fully collateralized.
This can be checked on the publicly available Etherscan, where the amounts of all collateral
locked in smart contracts can be seen.
Any token issuers that become undercollateralized will be liquidated by liquidation bots.
The UMA community is active and teeming with new developments.
Some of these include the newly introduced Yield Dollar or yUSD, which is a stablecoin-like
token that expires to a certain price on a set date.
Other new developments are Developer Mining and Liquidity Mining which rewards developers
and liquidity providers with UMA.
What about the UMA token?
What is it used for?
UMA is a governance token, which means it gives UMA token holders voting rights to make
changes or upgrades to the UMA protocol as well as occasionally vote on price requests
from financial contracts.
1 UMA token is equivalent to 1 vote, and 51% of voting tokens must vote in favor of a proposal
for it to be approved.
Voters are further rewarded through a token inflation rate of 0.05%, which is then proportionally
distributed based on the percentage of their holdings.
UMA is certainly a force to be reckoned with in the DeFi world, with huge potential to
open doors in the derivatives market for the average person.
That’s why it is called Universal Market Access – it’s secure, financial access
for everyone.
Are you an UMA token holder?
What are your price predictions?
Let us know your UMA prediction in the comments below.
And if this video helped you understand UMA, give it a thumbs up and subscribe to the channel
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