Universal Market Access (UMA) is an open-source optimistic oracle protocol on Ethereum that enables developers to create financial contracts and synthetic assets. UMA uses a "true unless disputed" escalation model to ensure the highest data integrity for a range of Web3 applications. Furthermore, the UMA oracle service uses the innovative data verification mechanism (DVM) for dispute resolution. The native UMA coin grants holders the right to vote on update proposals to make changes to the protocol. Also, the UMA coin plays an essential role in dispute resolution. So, if you're one of the many who ask, "what is UMA?" - read on!
In this article, we dive deep into the UMA project. We’ll explore the native UMA coin and its various use cases. Also, we explore UMA’s Data Verification Mechanism (DVM) and how it resolves disputes throughout the network. Additionally, we examine some of the different types of oracles available and the various differences between them.
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What is an Oracle?
Before addressing the question of “what is UMA?”, let’s first look at oracles and how they work. Oracles are external services that interact with smart contracts. Because blockchains and smart contracts access real-world data, they rely on oracles to bring off-chain data onto the blockchain. Furthermore, Oracles connect smart contracts and decentralized applications (dapps) with verifiable data sources in a way that facilitates novel use cases for Web3 technologies. By accessing trusted data sources from beyond the native blockchain network, developers create complex smart contracts to automate agreements between parties without trust.
Oracles can bring data onto the blockchain in the form of price feeds, traffic updates, weather reports, or simple notifications. However, oracles are only the carriers of this data. As an example of how oracles work, imagine a scenario where you and a friend make a bet on a sports game using smart contracts. These smart contracts would likely use oracles to fetch data from various sports websites or a trusted application programming interface (API) to verify the outcome of the game, as they cannot interact with these websites directly. Accordingly, the smart contract agreement can execute without interference from either party.
Different Types of Blockchain Oracles
There are several different types of oracles, each designed to relay data on-chain slightly differently. Nonetheless, each type of oracle helps to broaden the scope for Web3 technologies. For example, some oracles source data from hardware while others source it from software.
Also, some oracles can only bring data in one direction (on-chain), while others can take it back and forth between a blockchain and a data source. Furthermore, oracles fall into different categories depending on if they are centralized or decentralized. As such, oracles tend to fall into several categories simultaneously.
What is UMA?
So, what is UMA? Universal Market Access, or UMA, is an optimistic oracle and dispute arbitration protocol on Ethereum. The project, co-founded by Hart Lambur and Allison Lu in 2018, enables users to create secure, accessible, decentralized financial products and services. The UMA oracle mechanism allows multiple types of data to be brought onto the blockchain for use in smart contracts for prediction markets, cross-chain bridges insurance, and derivatives. Also, UMA’s Optimistic Oracle makes it easy to request and receive price data quickly and without friction.
UMA’s oracle serves as a “generalized escalation game” between smart contracts that request data from the UMA dispute resolution system called the data verification mechanism (DVM). Any disputed data proposed by UMA’s Optimistic Oracle is sent to the DVM. Accordingly, smart contracts can retrieve price feeds within a predefined period without requiring asset prices to be written onto the blockchain. Further, all disputes are resolved after 48 hours by UMA token holders who vote on the correct price of an asset for that period.
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How Does UMA Work?
The UMA protocol facilitates the creation of synthetic assets known as “priceless financial contracts”. These assets can track the value of real-world assets and aim to make financial markets more accessible. Also, these assets are made available via a unified global marketplace where holders can trade financial products. As such, the UMA protocol incentivizes “open and fair markets” by allowing anyone to access financial risk without a central authority or intermediaries. Instead, the UMA ecosystem uses a decentralized autonomous organization (DAO) to facilitate community governance.
When participants request price data, they submit information about the price identifier in question, the timestamp of the price request, and any data that pertains to additional arguments that accompany the price feed. Additionally, requestors must submit the information that refers to the currency that will pay for the service and the reward for the participant who calls the request.
Anyone can request price data, even if they are not registered with the DVM. Also, proposers answer data requests by referring to off-chain price feeds. As a reward for fetching this data, proposers receive a predetermined “proposal reward” that the requestor sets. However, proposers must stake a "proposal bond", which they can lose if the data they provide is incorrect or disputable.
Furthermore, UMA uses a "proposal liveness period" within which disputers can refute token prices provided by proposers using off-chain price feeds. The proposal liveness period creates a window in which disputes can be submitted before token prices are agreed upon. In the case of a dispute, token prices enter the DVM, where they undergo a 48-96 hour voting period to achieve a resolution.
The Data Verification Mechanism (DVM)
UMA's data verification mechanism (DVM) is the in-house dispute resolution mechanism for UMA contracts. Any disputes relating to UMA's Optimistic Oracle or contract liquidations are channeled through the DVM. When price disputes arise, the prices in question are submitted to the DVM, where UMA token holders can vote on the correct price of a token at a specific timestamp. Votes are counted after 48-96 hours when the dispute resolves.
Furthermore, if the DVM identifies that the disputer was correct, the proposer or liquidator who raised the dispute loses their bond, and the reward goes to the disputer. Likewise, if the disputer is found to be incorrect, they lose their bond, and the proposer or liquidator receives the reward. This creates a financial incentive for all participants to act honestly.
Additionally, UMA's oracle framework uses economic guarantees about the cost of attacking the DVM. This ensures that attacking an oracle costs more than the potential profit one can gain from doing so.
UMA Coin
The UMA coin (UMA) is the native cryptocurrency of the UMA ecosystem. It plays numerous roles throughout the platform. However, the primary role of the UMA coin is as a governance token. As such, it grants holders voting rights to make changes to the protocol. However, the UMA coin also guarantees the security of smart contracts and oracle systems throughout the platform. UMA coin holders can participate in decentralized governance by voting to change protocol parameters, such as UMA improvement proposals (UMIPs). Also, the UMA coin is essential for resolving disputes in the DVM and fulfilling requests.
New units of UMA coins enter circulation via a novel "developer mining" mechanism. Developer mining rewards developers for deploying high-utility contracts based on usage. Also, this type of cryptocurrency mining enables developers to have a stake in the ecosystem they help to create. At the time of writing, the UMA coin is trading at around $3.10, with a market cap of $213 million, according to CoinGecko.
Outcome Finance
Powered by UMA, Outcome Finance creates tools that enable decentralized autonomous organizations (DAOs) to optimize financial operations, community incentives, and on-chain governance using UMA's Optimistic Oracle. The two flagship product offerings are UMA's KPI Options and Performance Tokens.
KPI Options
Key Performance Indicator (KPI) Options are next-generation synthetic tokens that derive their value from varying collateral amounts according to "the value of an arbitrary metric at a predefined expiry date". Most synthetic tokens derive their value from things like the price of stocks, assets, or commodities. However, KPI Options from UMA derive their value from successfully meeting KPIs across numerous decentralized finance (DeFi) protocols.
Furthermore, KPI Options incentivize holders to actively improve Defi protocols. Moreover, when the KPI target of a token is met, the value of the KPI Option increases. Naturally, Outcome Finance relies on UMA's Optimistic Oracle service to accurately report the outcomes of these KPI targets on-chain. Also, Outcome Finance enables users to create KPI Options relating to the total value locked (TVL) metric of a DeFi protocol via DefiLlama and on-chain activity via The Graph in around 30 minutes.
Success Tokens
Outcome Finance's Success tokens provide a novel mechanism that enables DAOs to diversify treasury holdings and "sell tokens to investors in an incentive-aligned way". Success tokens combine a predefined number of tokens and a covered call option for the token in question. Also, DAOs can negotiate various parameters of Success tokens before deployment. This includes the strike price and expiry date of the call option, the sale price of the Success token is old, the collateral that serves as the floor value of each success token, and the type of collateral covering each call option.
When it comes to payout calculations at expiry for Success tokens, investors receive their portion of project tokens and a portion of the collateral backing covering call options when the expiration price is above the strike price. However, if the expiration price is lower than the strike price, investors only receive project tokens.
Exploring UMA and the UMA Coin - Summary
UMA's Optimistic Oracle is a secure, community-friendly service built for Web3. The project aims to minimize unnecessary oracle calls to reduce attack vectors and create a robust, equitable oracle solution. Also, UMA is censorship resistant and unobstructed by the exclusive markets that drive much of the value in today's world. Furthermore, UMA lowers the barrier to entry for trading financial risk, which previously required the support of local governments and regulators. It achieves this by providing a unified, equitable platform. There, anyone can buy or sell exposure on financial assets. That includes those living in countries with strict capital controls or inept financial and economic infrastructures.
As the Web3 landscape continues to evolve, UMA's Optimistic Oracle is becoming a popular service among emerging projects. In the future, we can expect to see a continuation of this trend as integrations continue to establish.
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