What is Universal Market Access (UMA)?
Universal Market Access (UMA) is a protocol for creating, maintaining, and settling derivatives for any underlying asset. At a high level, the UMA protocol allows users to create smart contract-tuned meta tags that represent an arbitrary derivative; Meta token traders can then express their market views without holding the underlying asset.
UMA’s Configurable Components
Public addresses of all counterparties
Margin accounts for each counterparty
The logic for calculating derivative economic terms (such as NPV or volatility)
A prophet is designated to report the data (i.e., the price) of the underlying asset
The contract has the function of modifying the margin balance and governs payment procedures; Each partner is required to maintain margin balances
Since each UMA meta tag references an off-chain feed (usually price) for underlying content, a primary design challenge is to safely encourage reporting of that data correctly to the UMA contract. To achieve this goal, the team released a magic design called the Data Verification Mechanism. At a high level, this system tries to provide economic guarantees that encourage accurate data reporting, through the Schelling-Point voting system, for the smart derivative contract by making it work. Feed damage becomes more expensive than profit from the wrong contract. This system has three main features:
The Cost of Corruption is the total market value of tokens required to spoil more than 50% of the votes, reported to the network using the Schelling-point system. This cost can be the price a malicious person has to pay to control these voting tokens on his own or a price bribing existing token holders.
Profits from Corruption is the measure of the possible financial benefits that an actor can achieve by breaking smart contracts through false data. Each smart contract must report its own profits from Corruption and the sum of these values taken into account when adjusting the CoC.
An enforcement mechanism ensures that the Cost of Corruption is greater than the Profit from Corruption through the token supply operation.
Benefits of UMA contracts
Tokenization of Financial Risk
Because UMA contracts are covered by smart contracts that have terms defined by contract partners, these smart contracts can use tokens to represent the degree of risk of each partner. If these tokens are fungible and conform to a standard, such as ERC-20, they will be easily traded and transferred on exchanges. This expands the visibility of the token, allowing individuals to access to financial risk without directly interfering with the UMA contract. This is especially important for investors with less capital, who do not need to commit to a UMA contract due to the divisibility of the tokens. Decentralized financial products, such as hedge funds DAO or others, may also tokenize their visibility. This allows the entity’s smart contract to do the job of maintaining visibility through the UMA contract, while the entity’s investors only need to trade tokens in their own wallet.
Engineered Price Stability
The price volatility of Bitcoin and other cryptocurrencies is often seen as the biggest barrier to cryptocurrency adoption. Stablecoins backed by fiat currencies or commodities, like Tether or Digix Gold, rely on a centralized party or physical audits to secure their value. Decentralized solutions, such as Dai and Basis, aim to solve this problem but have not yet been widely applied. In general, if an investor holding Currency A wants to invest in an asset with Currency B, then the investor’s exposure to that asset fluctuates with it. Because any profit in the property must be converted to Currency A. Similarly, when the aggregate asset rate is obtained, the calculation and margin deposits in the same currency as the base asset are the most natural. Because UMA contracts allow partners to define all the economics of their exposure, counterparties are able to define financial contracts allowing for synthetic exposure regardless of the change in the FX rate between the margin currency and the underlying asset’s currency.
Simplify institutional custody requirements for cryptocurrencies
Investing in cryptocurrencies and other crypto assets can be difficult for institutional investors. This is largely for custody and accounting reasons: each new asset requires new systems and processes to be built, tested, and approved, creating significant barriers to any token, newspaper, or new cryptographic system. Organizations can simplify this process by investing through financial contracts and standardizing their risk, custody, and accounting systems against a single standard, the UMA Protocol.
The UMA protocol is a decentralized specification that allows the trustless transfer of financial risk to any underlying asset to any individual worldwide. The protocol uses new systems and economic drivers to maintain collateral in a transparent and efficient manner, while simultaneously settling transactions accurately while allowing users full control of their economic implications. Together, these attributes allow and empower individuals to transfer financial risk, regardless of geographic location.
You can check the UMA price here.