To understand the Universal Market Access, you must first understand what derivatives and synthetic assets are.
Derivatives are contracts between two or more parties about an asset's price movements. The attraction about derivatives is that it gives investors exposure to an asset without actually having to the asset.
Example of derivative products are options, future, collateralized loans and prediction markets, which let investors interact with assets such as bonds, stocks and cryptocurrencies, without having to actually own or exchange any of them directly.
Because of complex legal frameworks and regulations, derivatives are traditionally restricted to accredited and institutional investors. But UMA is set to change all of this, by bringing the derivatives market, worth up to over 500 trillion dollars, to the decentralized world via the Ethereum blockchain.
What is the Universal Market Access or UMA?
An open source, financial contracts platform, UMA aspires to allow anyone to create collateral-backed synthetic assets in a permissionless and trustless way.
Imagine a future where an assets can be designed and created to track the price of anything, including real-world assets such as gold, the global stocks such as Tesla or Amazon.
It's not there yet, but UMA is poised to be a first mover as the protocol continues to grow and become more decentralized
Like derivatives, UMA lets investors interact with collateral-backed synthetic tokens, make bets and profit on their predictions, but all in a decentralized environment on the Ethereum blockchain.
UMA is developed by RISK LABS, whose mission is to provide anyone with a smartphone and internet, equal access to the financial derivatives market, and hence, Universal Market Access.
Risks Labs is co-founded by Allison Lu, a former Vice President of Goldman Sachs and Hart Lambur, a former professional trader at Goldman Sachs.
Top UMA investors include BainCapital Ventures, Two Sigma Ventures, Coinbase Ventures, Box Group and Dragonfly Capital.
How does UMA works?
This is how Universal Market Access works:
The price of a reference assets is identified
Smart contract terms are created with an expiration date
Sufficient collateral is deposited
Synthetic token is created
Positions are secured using financial incentives
An example situation to understand easier:
Let's take an example of Alice and Bob, and the price of potatoes, to more easily understand how this works.
Bob thinks that the price of potatoes will increase in three months, while Alice speculates that the price of potatoes will go down during the same time period.
Alice and Bob then enters a bet in the form of a smart contract agreement. As a deposit, they both provides a 10% margin.
Over the months, the price of potatoes drops. Bob has to cover his margin position by depositing more funds according to how much the price has fallen.
At the end of three months, the price of potatoes has fallen further by 30%. Alice wins the bet and the smart contract is automatically executed and settled in favor to Alice.
What mechanisms does UMA have?
To ensure the integrity of its financial contracts, UMA has two mechanism working behind it:
Priceless Financial Contract Designs (PFCD) - this creates self-executing, self-enforcing financial smart contracts.
Data Verification Mechanism (DVM) - a decentralized off-chain oracle that uses financial incentives and voting to value and secure these financial contracts.
Other protocols like Synthetix rely on price oracles, which are on-chain price data feeds to determine proper collateralization. Instead, UMA financially incentivizes its community to identify and ensure that token issuers, also called sponsors, are fully collateralized. This can be checked on the publicly available Etherscan, where the amounts of all collateral locked in smart contracts can be seen. Any token issuers that become undercollateralized will be liquidated by liquidation bots.
Developments of UMA
The UMA community is active and teeming with new developments. Some of these includes the newly introduced Yield Dollar or yUSD, which is a stablecoin-like token that expires to a certain price on a set date.
Other new developments are Developer Mining and Liquidity Mining which rewards developers and liquidity providers with UMA.
The UMA Token
UMA is a governance token, which means it gives UMA token holder's voting rights to make changes or upgrades to the UMA protocol as well as occasionally vote on price requests from financial contracts.
1 UMA token is equivalent to 1 vote, and 51% of voting token must vote in favor of a proposal for it to be approved.
Voters are further rewarded through a token inflation rate of 0.05%, which is then proportionally distributed based on the percentage of their holdings.
UMA is certainly a force to be reckoned within the DeFi world, with huge potential to open doors in the derivatives market for the average person. That is why it is called the Universal Market Access - it is secure and a financial access for everyone.
All images from : umaproject.org
Written by : @Ryryry143
UMA is definitely the one of the best crypto projects, specially for developers like me. I'm glad that I've invested in it at the early stage.