304 North Cardinal St.
Dorchester Center, MA 02124
The core of the protocol, the technology that makes UMA work, is fairly complex and not the topic of this post. Instead, we’ll concentrate on the whole situation. There is a great essay here that describes the project if you want to get deeply into the details and discover how UMA operates. The whitepaper for UMA is also accessible on GitHub.
The accessibility of the derivatives market is one of its main issues. There are restrictions on who may participate, just like there are with almost everything else in the current financial system. These restrictions take in several shapes.
The accredited investor rule, which restricts access to several financial products to people with $1 million or more
Identity restrictions prohibit signing up for trading if your identity cannot be verified. According to estimates, 1 billion individuals lack an ID card.
UMA wants to open up derivatives trading to everyone.
To trade a derivative on UMA, all you need is someone willing to take the opposing side of the trade. All positions are collateralized beforehand because UMA is trustless, making it impossible for any party to default without incurring a significant penalty. Decentralized finance is unique because to this.
In the conventional financial world, contracts are supported by the courts. The other party may file a lawsuit if the other party breaches a contract. This raises issues, though, if one party has the legal resources to file a lawsuit or if the two parties are in different countries. It heavily favours the powerful, wealthy players.
UMA is completely unique because of its smart contracts and collateralized holdings. Since there is no way for the derivative contract to default, it is controlled by code and never brought before a court (at least, not possible without a large financial loss). The benefit is because,
Any two individuals or businesses can conduct business with one another from anywhere in the world. Canada to Zimbabwe, the USA to China, etc. Since the courts are not involved, it makes no difference.
There is no inequality. There is no inherent advantage between a huge trader with plenty of resources and legal teams and a twenty-something day trader in Kansas City.
Contracts are immediately settled. The money is already in the smart contract, so when the contract expires, it can be paid out immediately.
The products that can be traded on UMA include some of the following:
Global & US Equities
Dominance of cryptocurrencies
Locked DeFi Total Value
Market Share of DEX
Curves of Tokenized Yield
Plans for Private Pensions
A derivative is an agreement about the price movements of an asset between two or more parties. Derivatives are appealing because they allow investors exposure to an asset without requiring them to possess it themselves. Options, futures, collateralized loans, and prediction markets are a few examples of derivative products that enable investors to engage with assets like bonds, equities, and currencies without having to directly own or exchange any of them.
UMA offers customers the option to construct a synthetic token that can follow the price of anything in addition to the ability to trade derivatives. The options are unlimited, but one apparent example may be a token that tracks the price of the S&P 500.
Stable currency in the Chinese Yuan
Tokens that follow any type of interest rate
Costs of soybeans
Prices of US 30-year treasury bonds
It can be tokenized if it has a price. Again, we won’t dive into the specifics of the technology, but a detailed explanation is accessible here.
It’s important to note that these tokens do not require an oracle. They don’t require a price feed to sustain their worth, eliminating a significant point of attack. One of the DeFi ecosystem’s weakest areas is frequently seen as Oracles.
Another decentralised financial product that doesn’t require on a centralised business or financial institution to settle transactions is UMA, another component of the DeFi money lego system. Thanks to its ingenious smart contracts, UMA connects buyers and sellers from all over the world, and all positions are pre-funded so that neither party can back out of the arrangement.
UMA’s Main Objective
To make finance more accessible is one of UMA’s primary goals. UMA enables users to invest in virtually any real-world asset by developing a system where Financial Derivatives can be accessed by anyone, anywhere. Many investors now have access to assets and new opportunities that they were unable to before. For instance, investors from underdeveloped nations have frequently been unable to purchase American equities; however, UMA would eliminate this problem by allowing anyone from anywhere in the globe to purchase the financial derivatives that track these stocks.
The difficulty for smart contracts and DAOs to communicate with actual assets on the blockchain is another issue that UMA addresses. Since the assets are not “on-chain,” a smart contract, for instance, would be impossible to automatically complete a transaction on the New York Stock Exchange. By creating a “on-chain” derivative of the real-world asset using UMA, the smart contract or DAO might indirectly invest in these “off-chain” assets. Future breakthroughs like decentralised pension plans or hedge funds run by DAOs might result from this.
The variety of cryptos that are available and the distinct systems that each crypto depends on have served as a barrier to institutions’ continued involvement in the field of cryptocurrencies. Traditional institutions are subject to stringent accounting, custody, and legal constraints. As a result, they must spend time and money reviewing, approving, and adopting the systems of each cryptocurrency they intend to invest in. With UMA, organisations may unify their risk management, custody, and accounting practises around a single standard, the UMA Protocol, and then use the derivatives offered by UMA to invest in any cryptocurrency they choose.
Through a Decentralized Autonomous Organization, UMA is governed (DAO). The main benefit that UMA offers its token holders is the capacity to influence the organization’s governance.
The crew behind UMA is among its most amazing features. In 2018, Allison Lu and Hart Lambur launched UMA. MIT-educated economist Allision Lu was a former vice president at Goldman Sachs. Hart Lambur is a Columbia University computer science graduate and a former bond trader for Goldman Sachs. The two together bring decades of institutional expertise from one of the biggest investment banks to UMA. The two founders have developed a profound understanding of the workings of traditional finance and derivatives thanks to their institutional experience.
Bain Capital Ventures, Blockchain Capital, Coinbase Ventures, Dragonfly Capital, Placeholder VC, Two Sigma Ventures, and YAM Finance are just a few of the remarkable strategic backers of UMA. The specific amount of money raised is not made known to the general public.
UMA Coin saw a massive 81% price decline to reach its current level of $7.9 after reaching an all-time high (ATH) of $43 in February 2021. The ATH established in February was primarily influenced by a number of recent product releases and announcements. The development of the Top 10 Wall Street Bets meme stock index uSTONKs, which tracked the price of the stocks GME, AMC, and NOK, was a particularly effective addition that helped UMA get a lot of additional attention and users.
Some of the elements affecting UMA’s future include:
Growth of the DeFi Industry: It is almost certain that the DeFi sector will keep expanding. The overall DeFi industry expanded by an astounding 47% in 2021 alone. Any DeFi project will obviously benefit from operating in a booming and lucrative business, but UMA will stand to gain even more since more projects will likely wind up using UMA’s Optimistic Oracle as the industry expands.
Total Locked Value in DeFi (Source: DeFi Pulse)
Debt and Margin Accessibility: Undoubtedly, UMA and DeFi have good intentions when they aim to make financial markets and financial derivatives more accessible. However, UMA’s intention to grant unrestricted access to margin to everyone is a potentially hazardous undertaking. Financial derivatives, like short sales, are risky and speculative and frequently result in enormous losses.
Technical Difficulty: Derivatives in finance are intricate. It rapidly turns into a very technical task when you consider the perplexing nature of smart contracts, UMA’s Optimistic Oracle, and the manual setup necessary for each contract. This intricacy could result in a bad user experience and make it difficult for many users to access the platform, impeding UMA’s efforts to
There isn’t a lot of detail in UMA’s future strategy. A target for 2022 is the implementation of a Multi DAO system. They will use two distinct governing DAOs, each serving a particular function, as opposed to just one. The UMA DAO will be utilised for decisions involving the Optimistic Oracle, UMA token holders, and strategic financing decisions. The superUMAns DAO will be used for smaller grants and projects. The goal of this division is to streamline and improve the governance process. The enhancement of user interaction with the UMA system is a key component of another important UMA strategy. This is undoubtedly encouraging news because it demonstrates that the team is indeed aware of the problems posed by UMA’s complexity.
Overall, there are clearly some obstacles to UMA’s success. However, the initiative does have a chance of success due to its strong team, place in a developing industry, and admirable aim.