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Home DeFi News UMA DeFi: Derivatives On The Blockchain

UMA DeFi: Derivatives On The Blockchain

Worldwide derivative markets are worth around 1 quadrillion dollars and are set for a world of disruption with the integration from DeFi and contribution from protocols such as Uma.

A derivative is a contract between two parties relating to the price of an underlying asset. They both are betting that the price of their asset will go up or down in let say, a 6 month contract. If the price goes up or down, the respective party profits and the other party loses money.

In simple terms, UMA puts derivatives on the blockchain.

UMA DeFi

 The founder, Hart Lambur, was a former trader at Goldman Sachs and founded Openfolio, a way to make tracking and managing finances easier. In 2017 he started Risk Labs, received 4 million in funding and acquired an all-star team of 7 including Allison Lu, former VP of Goldman Sachs. In December 2018 the UMA whitepaper was released.

Some notable backers include Coinbase Ventures, Dragonfly Backers Collective and [Placeholder].

Interesting Fact: UMA was the first project to launch an IDEO (Initial Decentralized Exchange Offering), which was held on Uniswap.

What is UMA?

Universal Market Access (UMA) is a protocol that can allow anyone to create a collateralized asset-backed token on the Ethereum blockchain. Examples of tokens that can be minted are that of gold, stocks or the price of oil.

The benefit of doing this is being able to have exposure to the price trends of a particular asset, without actually owning them. This can be useful in circumstances where only accredited investors can own the traditional asset, high fees are associated with the position or the physical asset itself is hard to access.

There are three conditions when collateralizing a synthetic asset:

  • The price of the asset being synthesized is clear.
  • There is an expiry date.
  • There is a minimum of 120% needed to collateralize the asset.

UMA only utilizes its oracle capabilities when there is a dispute regarding liquidations, which greatly lessens the risk of oracle failure when there are sudden moves in price.

UMA and DeFi

The way UMA can help with yield farming optimization stems from the ability to use any asset as collateral:

One may deposit DAI into Compound so they can receive interest from lending (6.8% at the time of writing) and receive aDAI back. That aDAI can then be collateralized via the UMA Protocol to track the price of an asset, thus reaping the return from both the interest generated from Compound and being on the right side of the price trend regarding the new synthetic asset.

Current Interest Rates for Lending / Borrowing. Source: DefiPulse

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