First Published on @IOSG Medium on Sep 22, 2020
We are excited to announce our recent investment into UMA and we believe IOSG Ventures and UMA’s cooperation will add much value in the open finance community and bring fresh opportunities for new applications and use cases!
UMA is a protocol for building synthetic assets. It provides smart contract templates, allowing anyone to create synthetic assets that track the price of any value subject. UMA also has its decentralized oracle system as a support.
Overall, the UMA project consists of two core concepts: Self enforcing contract design patterns that allow remargining, and an oracle mechanism for honest price reporting with economic guarantees.
Self-enforcing Contract Design Patterns
UMA protocol defines a generalized framework to enable the creation, purchase, and settlement of financial contracts, while allowing market participants to trade without counterparty or settlement risk, in a fully trustless and decentralized manner. The framework contains 5 core components: Public addresses of market participants; Margin subaccounts; NPV function to calculate the economic terms; Choice of oracle, Additional functions such as add/withdraw margin balances, regargin, terminate, or settle the contract.
Probably Honest Price Oracles
UMA’s oracle system is created based on the view that it is impossible to prevent bribes in a public, permissionless blockchain, unless we can have a system where the cost of corrupting the oracle is always greater than the profit from the corruption.
At a high level, in order to accomplish this economic gaming mechanism, UMA’s oracle system measures the cost of corruption with tradable voting rights (Schelling-Point system), measures profit from the corruption via contract registration, and ensures that the cost of the corruption will be higher than profit from the corruption via a variable fee policy. If you feel interested in the details you could review here: https://docs.umaproject.org/oracle/econ-architecture
The First Innovative Use Case on UMA — — The Yield Dollar uUSD
Nowadays, most popular decentralized finance (DeFi) protocols focus on floating rate, which many believe has obvious shortcomings. Fluctuations in interest rates make it difficult for both borrowers and lenders to make a certain plan for the future, and it is also not conducive to investment decisions and appropriate risk hedging. In comparison, in the traditional financial sector, fixed-rate borrowing is the main form of borrowing. In fact, about 90% of US mortgages are fixed-rate. Many of the largest financial products are either fixed interest rates, such as the bond market (over 100 trillion U.S. dollars), or derivative products with fixed interest rate components, such as the interest rate swap market (expected to exceed 500 trillion U.S. dollars).
The first yield dollar token model was inspired by Dan Robinson and Allan Niemerg in their paper Yield Protocol: On-Chain Lending With Interest Rate Discovery, and UMA as a decentralized financial contracts platform really makes this idea live — — the first yield dollar token uUSD (has changed the name from yUSD)!
According to Fred Ehrsam and Dan Robinson, this model creates 4 fundamental breakthroughs for DeFi:
- Fixed-rate borrowing/lending
- Debt is fungible and can be traded on decentralized exchanges
- Interest rates are implicit and determined by market
- Can be used to construct a yield curve
We believe that fixed-rate borrowing/lending will greatly improve many DeFi users’ experience. For instance, traders and liquidity miners can use fixed interest rates and regular borrowing to lock in long-term safe funds to ensure that the strategy can last long enough to obtain returns. Many users were previously concerned that the fluctuations in interest rates would require them to pay for high interest rates, and now they don’t need to worry about it.
For the DeFi industry, the yield dollar model also means a lot. uUSDs will tend to trade at a discount to their face value which is similar to zero coupon bonds in traditional financial markets and the “interest” paid is entirely determined by their market price rather than by governance or a formula. The market price can be used to create an interest rate oracle, and the yield curve can be calculated based on different expiration dates which can be used as a reference for the governance of other lending platforms such as Maker and Compound.
Our Vision on UMA
In our view, Web 3.0 ’s middleware stack improves decentralized collaboration , with the protocol’s native tokens enabled to capture the value that they generate (unlike HTTP in web 2, which is a free standard that generated great value but didn’t capture them).
IOSG Ventures believes UMA is becoming one of the most successful protocols in the middleware stack in Web 3.0. It provides smart contract templates that allow anyone to create a synthetic asset that tracks the price of any value subject matter. Its mechanism is simple: anyone can create tokens based on the UMA Protocol that track the price of everything from foreign exchange rates to stock prices, giving rise to a huge potential for UMA to become a key infrastructure for synthetic assets and a cornerstone of DeFi applications that expand into synthetic tokens.
UMA — Announcing the Yield Dollar on renBTC
https://medium.com/uma-project/uma-announcing-the-yield-dollar-on-renbtc-440a1ed0c5d5
