Universal Market Access (UMA) is a protocol for the creation, maintenance, and settlement of derivatives for any underlying asset. At a high level, the UMA protocol allows users to create smart contract-governed metatokens that represent an arbitrary derivative; traders of the metatoken can then express a market view without needing to hold the underlying asset.
Derivative markets have a large role in the traditional financial system, where UMA estimates there is $540 trillion notional value of outstanding OTC derivatives. Due to the existing counterparty risk for derivative issuers and significant volatility for traders, these markets are generally limited to institutional investors. Cryptoasset derivative markets are a rapidly growing aspect of the market for both retail and institutional investors and offer participants more granularity in trading opportunities compared to spot markets. BitMEX, the leading and unregulated derivative exchange has handled over $1 trillion in BTC derivative volume in the past year, while the institutional investor-focused Chicago Mercantile Exchange (CME, also a leader in non-crypto derivative markets) has seen recent volumes over $1.5 billion per day.
UMA’s goal is to broaden access to derivative markets beyond institutional investors, as well as reduce reliance on centralized exchanges with their associated custody risk.
Each UMA contract consists of five configurable components :
- Public addresses of all counterparties
- Margin accounts for each counterparty
- Logic to calculate the economic terms of the derivative (such as NPV or volatility)
- A designated oracle to report data (ie, price) of the underlying asset
- Contract functions to modify margin balances and govern settlement procedures; each counterparty is required to maintain a margin balance
The creator of each UMA contract locks collateral, initially DAI, in the margin contract; this collateralizes the value of the derivative metatoken. The amount of collateral required is a function of the historical volatility of the underlying asset.
UMA aims to address the oracle problem within blockchain-based systems, for which projects such as Chainlink, Augur, and Oraclize are also developing solutions. The first public instantiation of UMA is the USStocks token, which mirrors the S&P 500 stock index. While the USStocks token is a relatively simple derivative that mirrors price movements 1:1 (a total return swap), the UMA protocol supports arbitrarily complex derivative types, such as forwards, futures, options, and swaps, and on metrics beyond price such as volatility.
Since each UMA metatoken references an off-chain data feed (typically, price) about the underlying asset, a key design challenge is securely incentivizing the accurate reporting of such data to the governing UMA contract. To this end, the team has released an oracle design called the Data Verification Mechanism. At a high level, this system attempts to provide economic guarantees that incentivize accurate data reporting, via a Schelling-Point voting system, to the derivative smart contract by making it more expensive to corrupt the data feed than one would profit from the erroneous contract. This system has three key features:
- The Cost of Corruption is the total market value of the tokens required to corrupt over 50% of the vote, which is reported to the network using a Schelling-point system. This cost can be either the price a malicious actor would pay to control these voting tokens themselves or as the price of bribing existing token holders.
- A Profit from Corruption, which measures the possible financial gain that an actor could achieve by disrupting the smart contracts through erroneous data. Each smart contract must report its own Profit from Corruption, and the sum of these values in considered when adjusting CoC.
- An enforcement mechanism that ensures that the Cost of Corruption is greater than the Profit from Corruption through the manipulation of token supply.
Malicious actors wishing to bribe over half of the existing voting tokens must pay these token holders a bribe equal to or greater than the market value of their voting tokens because, once it is discovered that the system is compromised, their voting tokens will be redistributed to the correctly-voting holders and/or lose value. This leaves the malicious actors with only profits from corruption. If the market value (CoC) is made to be greater than the potential profits from bribery (PfC), bribery becomes unprofitable. Likewise, malicious actors who wish to control over half the active votes themselves will need to purchase over half of the voting tokens at market value. Thus, in the intended network dynamics, if the market value of these tokens (CoC) is more than one stands to gain from corrupting the system (PfC), corruption by way of owning half the voting tokens also becomes unprofitable.
When PfC begins to approach CoC, the system automatically levies a fee on each smart contract, proportionate to its size. In order to hold CoC above PfC, the DVM system uses these fees to buyback and burn tokens from public exchanges at the conclusion of each voting cycle. This process attempts to raise the market value of the remaining voting tokens and, thus, the Cost of Corruption. This aims to make the market value of the tokens at the end of the period consistently greater than the profit from corruption that could have been made during the period. As such, UMA argues that a rational actor will choose to maintain the integrity of the system in order to realize a greater profit from appreciation in token value than they would from corrupting the system.
The UMA project is led by CEO Hart Lambur, COO Allison Lu, and a team with a variety of experience in financial engineering and trading. While many metatokens may eventually be associated with the protocol, it does not have a native token and did not conduct a token sale. Equity investors in UMA include Placeholder, Blockchain Capital, Coinbase, and Two Sigma Ventures.