update 19 August 2021

Investing in UMA – Everything You Need to Know

The DeFi ecosystem is rapidly evolving and spurring new and fascinating projects that the cryptocurrency space did not even imagine a few years ago. The Universal Market Access or UMA is among them and one of the most innovative financial instruments deriving from blockchain technology.

If you have ever wanted to invest in any asset on any market in the world, UMA might be the solution for you.

This beginner’s guide to UMA should help you understand better one of the latest and most promising newcomers in the crypto universe!

UMA in a Nutshell

  • UMA is a DeFi protocol for priceless financial contracts on the Ethereum blockchain
  • UMA puts derivatives on the blockchain and allows users to gain access to them
  • UMA was launched in 2018
  • Risk Labs power UMA
  • UMA is a reliable link between real-world assets and blockchain applications
  • UMA has a native token called UMA
  • UMA is available to buy on both centralized and decentralized crypto exchanges
  • UMA can be stored in Ethereum-compatible wallets

What is UMA?

According to its website, UMA is a decentralized platform for financial contracts that would enable anyone in the world to gain access to assets that would otherwise be out of their reach.

The Universal Market Access works as a protocol built on the Ethereum blockchain. It stays true to its name by allowing users to develop custom-collateralized synthetic cryptocurrency capable of tracking the fluctuating price of almost any asset out there.

By empowering users to create their tokens, UMA takes Decentralized Finance (DeFi) and Yield Farming to a whole new level.

In a hypothetical situation, you could deposit crypto tokens into Compound or another money market protocol and lend it to the developers for a specific yearly interest.

In time, your deposit accumulates value thanks to the interest. You can use them as collateral to produce synthetic tokens representing a real-life asset’s price, like gold, for example. This token will then track the price of gold while increasing gradually with the yearly interest value.

UMA may very well be the first financial instrument to connect cryptocurrency users with traditional financial sectors like the derivatives market, which may be worth up to 1 quadrillion USD. This way, it provides regular investors with access to a previously available market only to accredited financiers, and it accelerates the mass adoption of blockchain technology.

What is the UMA token?

The UMA protocol also uses a native ERC-20 token called UMA, enabling governance on the protocol and paying for oracle services.

UMA provided an initial supply of 100 million UMA tokens. However, the asset does not have a hard cap, subject to inflation and deflation.

There are over 54,873,913 UMA in circulation at the time of this writing and a total supply of 100,803,688 UMA. Its current market capitalization is $853,041,389, and one UMA is trading for about $15.

A Brief History of UMA

UMA is the brainchild of the professional trader and former Goldman Sachs employee Hart Lambur. Using his computer science background and the experience of financial major-league players, he founded Risk Labs in 2017. The company managed to attract $4 million in funding from Bain Capital and Dragonfly Capital to create a unique asset in the cryptocurrency space.

They released the UMA whitepaper in December 2018, and a few days later, they officially launched the project. However, it wasn’t until April 2020 that UMA organized an Initial Exchange Offering (IEO) to raise more funds.

UMA chose a decentralized exchange for the IEO to keep in line with its all-access, self-enforcing way of doing business. Uniswap did the honors and listed UMA tokens at a price of roughly 0.26$USD. Only 2 million tokens were sold out of the 100 million ones issued initially.

The rest of the UMA tokens were allocated as such:

  • 5 million tokens were reserved for the founders of the project
  • 35 million tokens were allocated to the developers of the network
  • 5 million tokens were reserved for future sales

UMA remained quiet for the first few months, but it surged in value and popularity together with the DeFi craze of the summer. By the end of August, UMA tokens were trading for around $23 and ranked among the top-30 cryptocurrencies on the market.

In September 2020, UMA teamed up with Ren protocol to launch uUSD, a Yield Dollar together with a three-asset yield farming incentive that allows its users to lock renBTC into UMA. The participants can later use renBTC as collateral to mint uUSD and buy more renBTC to develop a permissionless leveraged position.

How does UMA work?

UMA works as an all-empowering blockchain-based platform that allows people to develop self-enforcing smart contracts with economic guarantees. It combines all the latest innovations in blockchain technology and Ethereum applications and established fiat financial derivatives concepts.

Contrary to traditional derivatives, UMA contracts are ensured only by economic incentives, making them self-enforcing and universally accessible.

UMA calls these operations “priceless financial contracts on Ethereum,” and they involve the use of four technologies:

  • Ethereum-based ERC-20 synthetic tokens
  • The Token Facility
  • The Data Verification Mechanism (DVM), which is a decentralized oracle service
  • The UMA Protocol

Let’s break them down and see what they are all about!

What are synthetic tokens?

According to the UMA documentation, “Synthetic tokens are collateral-backed [ERC-20] tokens whose value fluctuates depending on the tokens’ reference index.”

Simply put, synthetic tokens are derivative contracts on the Ethereum blockchain. They have three distinctive features:

  1. A price identifier, which means that they refer to the value of a particular external asset
  2. An expiration date, which is established by the contract conditions
  3. A collateralization requirement may fluctuate, although it must always be at least 120% of the tokens’ value on the verge of being issued.

What is the UMA Token Facility?

UMA enables any user to create synthetic tokens representing an external asset with the Token Facility feature’s help.

Users can develop a synthetic token by first establishing its 3 distinctive features. After creating the token, they become Token Facility Owners.

Other users can participate in the smart contract and boost more tokens by depositing the corresponding collaterals. These participants are referred to as Token Sponsors.

Let’s say a Token Facility Owner develops a smart contract through which it creates synthetic tokens that refer to the real-world price of gold. If a Token Sponsor is interested in investing in said contract, they deposit some collateral to issue more synthetic gold tokens themselves.

What is the Data Verification Mechanism (DVM)?

Like other DeFi protocols, UMA constantly verifies that the borrowers have the collateral necessary to cover the smart contract conditions. Instead of using oracles, as most DeFi’s do, UMA uses the Data Verification Mechanism (DVM).

The DVM incentivizes the token holders to check issuers if they are collateralized. If they find Token Facility Owners who do not meet the smart contract conditions, they can ask for their liquidation.

On the other hand, a Token Facility Owner can use the DVM to dispute a liquidation claim. Only at this point does an oracle intervene to check the price of the issuer’s collateral.

If the claim turns out to be illegitimate, the user who asked for liquidation is penalized, and the issuer may claim a reward instead. However, if the issuer is proven wrong, the liquidator may receive all the collateral attached to the smart contract.

How does the UMA Protocol work?

The UMA protocol ensures governance on the UMA blockchain. The token holders have significantly high power for a DeFi project. Their responsibilities include:

  • Voting on the price of an asset when a request is given to the DVM
  • Voting on changes and upgrades to the UMA protocol

Through the Token Facility feature and the Data Verification Mechanism, the UMA users can develop new synthetic tokens, create new assets, and even remove smart contracts when the Token Facility Owners do not meet the conditions.

Any user can develop a UMA Improvement Proposal (UMIP), which comes from a standardized application subject to public voting from the other users.

For a UMIP to pass, the users have to amass 51% of token votes, where 1 token equals 1 vote. Voters receive 5% of the 100m initial supply, which is distributed proportionally to the percentage of the total supply they staked. Inactive UMA holders do not receive a reward, so they have an extra incentive to remain active and participate in the community’s operations.

Where to Buy & Store UMA

UMA is today available to buy from a wide range of decentralized and centralized crypto exchanges that include:

  • Coinbase | Poloniex | OKEx | Uniswap | Balancer
price change

Because it is an ERC-20 token, you can store UMA in any Ethereum-compatible wallet, such as:

  • MyEtherWallet | Ledger Nano S | Exodus | Atomic Wallet

The Benefits of Investing in UMA

  • UMA provides an honest DeFi protocol with a unique decentralized oracle design
  • UMA allows you to tokenize virtually any asset in the world
  • UMA provides easy access to the derivatives sector and other financial markets that only provided exclusive entry previously
  • UMA tokens give you relevant user power on the protocol
  • UMA enables you to promote and gain exposure for an asset by displaying it to potential investors worldwide

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