Site icon CrypticOcean Blog

A 5 Minute Complete Guide to UMA – Universal Market Access Protocol

UMA

UMA is created following the concepts borrowed from fiat financial derivatives, as an open-source protocol that allows any two counterparties to design and create their own financial contracts.

It is designed to offer the financial innovations made possible by permissionless, public blockchains like Ethereum.

But unlike traditional derivatives, UMA contracts are secured with economic incentives alone, making them self-enforcing and universally accessible. 

UMA, the project builds “open-source infrastructure for ‘priceless’ financial contracts on Ethereum.”

The infrastructure of UMA is composed of two main parts: priceless financial contract designs and Data Verification Mechanism (DVM).

Working of UMA as a financial derivative (for apples)

Custom 2 party agreement

Alice thinks the price of apples will go down over the next six months.

Bob thinks apples are cheap and want to go long.

Bob and Alice formalize their trade using a UMA smart contract.

Both sides deposit a margin requirement of 10% that will be lost if they misbehave. 

Automatic Enforcement

Over the next six months, the price of apples shifts up and down (but mostly down).

As the price shifts down (as verified by UMA’s oracle), Bob automatically contributes money to cover his margin requirement.

The more it shifts down the more he contributes.

Instant Settlement

After six months, the price of apples has fallen by 30%.

Alice’s bet was right.

Because Bob was consistently contributing funds to re-margin his position and not risk losing his 10% margin requirement, the contract can be instantly settled.

Implications of the protocol

What will you build with UMA? 

Synthetic tokens for tracking

With the token builder, it is easy to track the price of everything.

Choose the price and deposit DAI and it’s done. 

Under the hood, the Dapp creates a token facility by launching a smart contract.

After you deposit DAI into your token facility, you’re able to mint synthetic tokens that are fully backed by the DAI you deposited.

Overcollateralization of your token facility ensures that the synthetic tokens are fully backed at all times.

This helps reassure anyone buying the synthetic tokens that they’re fully backed (by you).

At any time, anyone can ask the smart contract to check if your token facility is undercollateralized.

During this process, the smart contract checks what the latest price is from the price feed and checks if the amount of DAI you’ve maintained in the contract meets the required amount.

If you do, you’re all set. If you don’t, the smart contract freezes all the collateral in the contract (you can’t deposit or withdraw) and assesses a penalty.

Anyone who holds synthetic tokens that were minted by this token facility can redeem them for a proportional amount of the backing collateral, plus any penalty. 

Ideas to build with synthetic tokens – 

Decentralized crypto futures

UMA protocol offers : 

Context cont’d: Investor and Provider back their promise with margin. The provider uses digital asset M as collateral, which must be above margin requirement MR at all times. A default penalty DP is assessed if the Provider fails to maintain M > MR at all times.

Building yield curves on ether

Teams and supporters of UMA protocol

UMA is backed by a diverse team driven by a passionate belief that financial markets should be universally accessible.

The team of eight includes alumni of Google, Goldman Sachs, five venture-backed startups, and three economics doctoral programs.

Risk Labs, the company supporting this protocol development, raised a $4M seed round led by Placeholder with participation from Bain Capital Ventures, Blockchain Capital, Box Group, Coinbase Ventures, Dragonfly Capital, FinTech Collective, and Two Sigma Ventures.

Conclusion

Cryptic Ocean is a blockchain technology company that provides end-to-end blockchain development and blockchain consulting services to multiple business domains.

Our goal is to assist corporations adopt new technologies and change difficult problems that arise throughout technology evolution.

Contact us for the most effective solutions regarding the utilization of blockchain technology to resolve the toughest challenges faced by the globe nowadays.

If you found this article interesting, here you can find more Articles.

Exit mobile version