UMA Review

What is UMA?

Universal Market Access (UMA) is an Optimistic Oracle (OO) that serves data to smart contracts. Upon a price request, anyone can push an answer on-chain. The system works “optimistically”, meaning that the dispute can be raised only if someone considers the data to be wrong.

The Optimistic Oracle became live in May 2021. Initially launched as a platform that allowed anyone to create synthetic tokens, UMA evolved into a system which can bring all types of data on-chain. 

The UMA protocol was established by the Risk Labs foundation. Founded in 2017, it raised $4 million from companies such as Bain Capital and Dragonfly Capital, and in December 2018 the UMA project white paper was unveiled. A few days later, the developers announced an official launch of the UMA project and introduced the USStocks token as the first product for the core network. UMA held an ICO in April 2021, which was notable for being the first ever initial offering of a decentralized exchange on Uniswap.

How does UMA work?

UMA's Optimistic Oracle allows contracts to quickly request and receive price information. Taking into consideration that the classical oracles are prone to failure due to viruses and hacks, and that any oracle in the public blockchain can be bribed, the UMA team has developed a different approach to the principles of oracles. The UMA protocol offers its users financial incentives to identify and eliminate token issuers that they believe have insufficient collateral. To this end, it uses a data verification mechanism, or DVM.

UMA’s Oracle-based DVM mechanism has an economic guarantee to eliminate corruption in the system. Thus, the cost of manipulating the oracle (the cost of spoiling) is always higher than the profit that can be made by corrupting the oracle data (the profit of spoiling). Using game theory, in which the cost of corruption (CoC) is always greater than the profit from corruption (PoC), you can remove any financial incentive to corrupt the system and greatly reduce security risks.

Such a principle divides the oracle's work into three steps: measuring the cost of corruption (CoC), determining the profit of corruption (PoC), and creating a mechanism in which the CoC is always greater than the PoC. Since the price that the DVM of the oracle is based on the majority of other network members' votes (51%, which requires a minimum of 5% of all tokens to be used in voting), the cost of corruption is to own more than 51% of all UMA tokens, since these are the ones used to vote on the price.

To estimate PoC, all smart tokens issuing synthetic tokens must report the potential profit that could be extracted from them if the oracle were corrupted. Adding up the value of all the assets in the various smart contracts on the UMA app provides PoC.

To ensure that CoC is always greater than PoC, UMA buys and burns the UMA tokens that are currently on the market to ensure that their value is always higher (mostly, two times) than the total amount of assets locked into the protocol.

How to use UMA?

All the UMA token owners can participate in the UMA oracles mechanism. Because UMA tokens are ERC-20 tokens built on Ethereum, to use UMA wallets like Metamask, Trezor, or Ledger must be connected to the UMA application.

There are three actors in UMA's Optimistic Oracle system: the contract requesting the price, the out-of-network participant offering the price, and the disputant — an out-of-network participant who can dispute prices with which he or she disagrees.

At best, the contract asks for a price and specifies a dispute period (which can range from a few minutes to a few days). The offerer places the bond and offers a price, and no one disputes the price. After the dispute period has passed, the details are clarified and the offerer gets his/her bond back.

However, sometimes there may show up a disputant who disagrees with the price offered. The disputant posts a deposit equal to the offerer's deposit and passes the dispute to the UMA Data Validation Mechanism (DVM). UMA token holders resolve the dispute within 48 hours. If the disputant is right, they get the proposer's deposit as a reward; if the disputant is wrong, they lose their deposit as a penalty, which goes to the proposer.

Voting in the oracle has three phases: a voting confirmation period, during which the vote is recorded (24 hours); an open voting period, during which the users’ votes are revealed, and then the results are tallied by the DVM smart contract; a reward claim period, during which the user can claim the reward in US dollars generated by the protocol if the user voted correctly, as determined by DVM.

On the Voter dApp page, the user will see active votes in the Active Requests table, after which they can enter their vote for each of the active requests. The user can edit their vote before the disclosure period begins. A snapshot is taken at the beginning of the disclosure period. Once a vote is revealed, it cannot be revoked. If there are rewards to claim, the user will see a "Claim rewards" button at the top of the dApp.

The UMA token

UMA is an ERC-20 token used to drive the UMA protocol and to vote on the price of an asset when the DVM oracle is called to challenge a collateral liquidation claim. The initial supply of the token was 100 million, with the token being inflationary or deflationary depending on two elements: the amount of value currently in the protocol (the higher the price, the more frequently tokens are bought and burned) and the amount of UMA used to vote in the protocol (to encourage voter participation, an inflationary reward equal to 0.05% of the current UMA supply is distributed to active voters each time the network goes to vote).

In April of 2021, UMA hosted the first ever initial decentralized exchange offering on Uniswap. This saw 2 million of UMA’s 100 million initial supply sold at a cost of roughly 0.26 USD. Of the remaining 98 million tokens, 48.5 million tokens were reserved for the founders of the project, 35 million tokens were allocated to the developers of the network, and 14.5 million tokens were reserved for future sales.

Is UMA safe?

Risk Labs is the foundation and team behind UMA, and UMA’s partnering projects Across and Outcome.Finance. The company’s founder Hart Lambur was a professional trader at Goldman Sachs and had expertise in computer science. He left the trading business to join the cryptocurrency field entirely. 

Hart co-founded Risk Labs in 2017 with Allison Lu, who was formerly a vice president at Goldman Sachs, and Regina Tsai, an educated financial engineer and financial analyst at Princeton.

Partners

UMA’s optimistic oracle is used by a large number of decentralized finance projects. These projects include UMA partner organizations Across and Outcome as well as risk management platform Sherlock. UMA acts as an impartial decentralized arbitrator for Sherlock, with disputes submitted with and voted on UMA's OO. 

Polymarket, a decentralized information markets platform, uses UMA as a resolution source for its markets. UMA also helps the synthetic assets platform Yam Synths, which was built on UMA, offer worldwide access to advanced trading of synthetic products.

Other UMA’s partners include Jarvis Network, a DEX for dominance trading Domination Finance, and a bug bounty protocol Hats.finance. All of these projects leverage UMA’s oracle.

What's next?

UMA will continue to help Web3 projects access valid data they need to power their protocols. The current focus is on information markets and insurance, as well as cross-chain bridging.

Links

https://docs.umaproject.org/

https://umaproject.org/