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Academy > Crypto Insights > What Is Universal Market Access (UMA): A DeFi Approach To Financial Derivatives   >

What Is Universal Market Access (UMA): A DeFi Approach To Financial Derivatives  

2022-03-30 12:04:11

Critics of cryptocurrency often point to its adoption as a revolution that is merely driven by monetary incentives; however, that is quite far from the truth. The current crypto revolution is driven by a range of goals and objectives that aim to transform the world we live in. One of these goals is to create an accessible global financial market that empowers individuals who have previously been disenfranchised by traditional financial institutions. 2021 saw a wave of new DeFi projects develop in hopes of making this goal a reality. One project that has grown out of this mission is Universal Market Access (UMA). UMA coin is currently trading at $7.9, with a circulating supply of around 65.5 million coins, and a market cap of approximately $519.5 million.

uma coin

What is UMA?

UMA is a DeFi platform that aims to democratize finance by making financial derivatives accessible and secure for everyone. UMA consists of two main products that work together to achieve its goal of increasing accessibility within the financial markets.

UMA’s Priceless Contracts

The first main product is UMA’s “Priceless Contracts.” These are smart contracts that allow users to create various financial derivatives and synthetic tokens. A financial derivative is a contract that tracks the price of an underlying asset and allows investors to receive price exposure without having to own the asset itself. Financial Derivatives have typically been inaccessible and only available to institutional investors due to the large amount of risk and capital involved.

UMA’s Optimistic Oracle

UMA’s second main product is their “Optimistic Oracle.” Oracles are programs that allow blockchain smart contracts to access external real-world data. Think of oracles as a database that feeds information directly from the real world into the blockchain. An oracle is necessary for UMA as many of UMA’s financial derivatives are tracking the price of real-world assets and thus, need an Oracle to feed them real-time price data. However, rather than using an existing oracle, UMA opted to create their own program, the “Optimist Oracle.” UMA’s oracle is cheaper, more secure, and more flexible. The “Optimistic Oracle” is utilized by both UMA’s own smart contracts and other external DeFi projects.

Oracles with the Blockchain

Oracles Connect Real World Data with the Blockchain (Source: Better Programming)

How Optimistic Oracle Works

UMA has created an Optimistic Oracle that is utilized by both UMA’s own smart contracts and other third-party DeFi projects. How the Optimistic Oracle works is simple. A “requester” contract will request the price of an asset. Then an off-chain actor, the proposer, will propose a price for the contract. A disputer can then dispute the price if they disagree with it. If a disputer decides to dispute the price and is wrong, they must pay a penalty; and if the disputer is right, then the proposer who provided the incorrect price must pay a penalty. The “Optimistic” nature of the Oracle means that the automatic assumption is that the data is correct, and the data is only flagged if an actor actively disputes the data.

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How Does UMA Work?

UMA’s Main Objective

One of UMA’s main objectives is to increase the accessibility of finance. By creating a system where Financial Derivatives can be accessed by anyone, anywhere, UMA allows users to invest in practically any real-world asset. This opens many investors to new opportunities and assets that they previously have been unable to access. For example, investors in developing countries have often been unable to invest in American stocks; however, with UMA, these issues would be resolved as anyone from around the world could invest in the financial derivatives that track these stocks.

Another barrier that has traditionally existed for investors who try to access financial derivatives is the extensive cost and margin required. Even investors who have access to derivative trading platforms still need to receive approval for margins and leverage from their brokerage. This creates a barrier for individuals with low incomes and poor credit scores from accessing derivative trading. UMA allows anyone to invest in financial derivatives regardless of credit score or income.

UMA’s Smart Contracts & DAOs

Another problem UMA solves is the difficulty for smart contracts and DAOs to interact with real-world assets on the blockchain. For example, a smart contract would be unable to automatically execute a transaction on the New York Stock Exchange, as the assets are not “on-chain.” With UMA, the smart contract or DAO could simply create a derivative of the real-world asset “on-chain,” thus allowing the smart contract to indirectly invest in these “off-chain” assets. This could lead to unique future innovations such as decentralized pension plans or DAO governed hedge funds.

Increased Institutional Involvement

One barrier that has prevented institutions from becoming further involved in crypto is the wide range of cryptos that exist and the separate systems that each crypto relies on. Traditional institutions have strict accounting, custody, and legal regulations they must abide by. Thus, they must vet, approve, and adopt the system of each crypto they hope to invest in, a time-consuming and costly process. With UMA, institutions can standardize their risk, custody, and accounting around just one standard – the UMA Protocol – then utilize UMA’s derivatives to invest in any crypto they desire.

UMA’s Governance

Governance of UMA is done through a Decentralized Autonomous Organization (DAO). This ability to influence the governance of UMA is the primary utility UMA provides its token holders.

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Who Is Behind UMA?

One of the most impressive aspects of UMA is the team behind it. UMA was founded by Allison Lu and Hart Lambur in 2018. Allision Lu is an Economics graduate from MIT and a previous VP at Goldman Sachs. Hart Lambur is a computer science graduate from Columbia and a previous bond trader at Goldman Sachs. Together the two bring to UMA decades of institutional experience from one of the world’s largest investment banks. It’s this institutional experience that has allowed the two founders to gain a deep understanding of the operations and issues surrounding traditional finance and derivatives.

UMA is backed by an array of impressive strategic partners including Bain Capital Ventures, Blockchain Capital, Coinbase Ventures, Dragonfly Capital, Placeholder VC, Two Sigma Ventures, and YAM Finance. The precise quantity of funding raised is not publicly available.

UMA Coin Price History

UMA Coin hit an all-time-high (ATH) of $43 in February 2021 before dropping to its current price of $7.9, a significant 81% decrease. The ATH set in February was primarily driven by a variety of new announcements and product launches. The creation of the meme stock index uSTONKs, which tracked the price of the Top 10 Wall Street Bets stocks (such as GME, AMC, and NOK), was a particularly strong addition that led to UMA receiving large amounts of new attention and users.

A few months later in May, UMA saw its price drop from $27 to $11. This crash was primarily a result of macro-level issues that led to significant losses across the crypto market, with the overall crypto market dropping a staggering 49% in a week.

Today, UMA Coin’s price has yet to fully stabilize. UMA has spent much of 2022 trading downwards and has only recently found a short reprieve with some sideways trading.

UMA All-Time Performance

UMA All-Time Performance (Source: Coin Market Cap)

What Is the Future of UMA?

Some of the factors that will influence UMA’s Future are:

  • DeFi Industry Growth: The DeFi industry will almost certainly continue growing in prominence. In 2021 alone, the overall DeFi industry grew a staggering 47%. Operating in a growing and profitable industry will undoubtedly be beneficial for any DeFi project; however, it will be especially beneficial for UMA, as the larger the industry grows the more projects that will likely end up employing UMA’s Optimistic Oracle. total Value Locked in De-FiTotal Value Locked in DeFi (Source: DeFi Pulse)
  • Accessibility of Margin and Debt: Increasing accessibility to financial derivatives and financial markets is undoubtedly a positive goal of UMA and DeFi. However, UMA’s desire to give anyone and everyone unrestricted access to margin is a risky and potentially dangerous endeavor. Financial Derivatives, such as shorts, are volatile and speculative and can frequently lead to massive losses.
  • Technically Complex: Financial derivatives are complex. Add on the confusing nature of smart contracts, UMA’s Optimistic Oracle, and the manual set-up of required for each contract, and it quickly becomes an incredibly technically complicated endeavor. This complexity may lead to poor user experience and serve as a barrier for many people to access the platform; thus, hindering UMA’s goal of improving the accessibility of finance.

UMA Future Plans

UMA does not have a very extensive roadmap for the future. One of their goals for 2022 is to transition to a Multi DAO system. Instead of using only one governing DAO, they will have two separate DAOs each with a different purpose. The superUMAns DAO will be used for smaller grants and programs, and The UMA DAO will be used for decisions surrounding the Optimistic Oracle, UMA token holders, and strategic funding decision. This separation aims to create a quicker and more efficient governing process. Another significant plan of UMA is to improve the user experience of those interacting with the UMA system. This is definitively positive to hear as it shows the team is indeed aware of the issues surrounding UMA’s complexity.

Overall, UMA undoubtedly faces some barriers to their success. However, its strong team, its position in a growing industry, and its commendable mission, does provide the project a potential road to success.

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UMA is a DeFi company that hopes to increase the accessibility of finance through their Priceless Contracts and their Optimistic Oracle. UMA’s Priceless Contracts will allow users to invest in financial derivatives and assets that they previously may not have been able to access, while their Optimistic Oracle is helping to empower other DeFi companies also aiming to create a decentralized and accessible financial ecosystem.

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