UMA — Enabling Universal Market Access
Today we’re announcing UMA, a decentralized financial contracts platform built to enable Universal Market Access.
Similar to how HTTP allows information to move across borders, UMA allows risk to move across the internet without a centralized authority or single point of failure.
UMA consists of two parts: a specification for self-enforcing financial contracts, and a “provably honest” oracle used to value and margin those contracts. The system is designed to power the financial innovations made possible by public blockchains, like Ethereum. Borrowing concepts from traditional (fiat) financial derivatives, UMA defines an open-source protocol to create and verify trustless financial contracts—allowing anyone, anywhere, to design and build their own universally accessible financial products.
Motivation and Implications of UMA’s “Risk Transfer” Protocol
Over-the-counter (OTC) financial contracts are bilateral agreements that enable any two counterparties to trade or hedge almost any form of risk. In the fiat world, these contracts are secured by two mechanisms: margining, where counterparties post collateral as the value of the contract changes; and legal recourse, where you sue if the contract is not honored. Legal recourse limits access to this system to those that are big, powerful, or lucky.
Unlike the traditional world (where moving money and margining a contract can take days), blockchains allow financial contracts to be valued and re-margined on a nearly continuous, real-time basis. This near real-time margining allows for trustless financial contracts that are secured with economic incentives alone (no legal recourse required).
This has big implications:
- Trustless, permissionless risk transfer eliminates almost every barrier blocking access to financial markets. Anyone with access to the internet and internet money (aka crypto) could gain access to any financial market.
- Countries with weak financial systems are no longer restricted by their local infrastructure: individuals in developing countries could access any financial product available anywhere via a trustless financial derivative.
- Risk becomes universally programmable: smart contracts could hedge, trade or invest in financial markets of all types, opening up massive opportunities for decentralized financial products.
In essence, UMA can enable a truly global financial market.
We believe uncensored access to financial markets is an important prerequisite to a free, open, and fair financial system. The gains in innovation, efficiency, and equality from this system have the potential to improve the lives of billions of people around the globe.
UMA introduces a practical, real-world implementation for trustless financial contracts that fits within the technical constraints of current blockchain limitations. Expensive transaction costs are minimized through a margining system where counterparties monitor and value their trades off-chain and only pay the required computation costs (gas) to re-margin on-chain when it is in their economic interest to do so. The specification is fully detailed in our whitepaper.
“Provably Honest” Oracle Design
UMA contracts require a truthful oracle for real-time valuation, settlement, and dispute resolution.
Our approach to the decentralized oracle problem embraces the view that any oracle on a public blockchain can be bribed. We believe any decision-making system — no matter how clever — can be corrupted at its source if enough money is paid to the right people. And because blockchain identities are pseudo-anonymous, you can’t sue people or send them to jail for paying bribes. The only tool we have to motivate truthful behavior is economic incentives.
Since any oracle can be bribed, we believe the only way to build a provably honest oracle is to create a system where the Cost of Corrupting (CoC) the oracle is always greater than the profit that could be earned by corrupting the system (PfC, or Profit from Corruption). If we can build an mechanism where CoC > PfC at all times, then there will never be an economic incentive to corrupt the system—and the oracle can be proven to be game theoretically secure.
We’ve done some fantastic research in this space, and we’re excited to contribute our work back to the community for peer review. We’ll be open-sourcing our Github and releasing a second whitepaper detailing our oracle design and CoC > PfC framework in the near future.
Our oracle is designed to be used by other decentralized projects too — if you are a project in the space looking to collaborate on oracle R&D please get in touch.
Our Team and Our Supporters
UMA is backed by a diverse team driven by a passionate belief that financial markets should be universally accessible. Our team of eight includes alumni of Google, Goldman Sachs, five venture-backed startups, and three economics doctoral programs. We are incredibly fortunate to count Chris Burniske, Jill Carlson, Noah Jessop and Prof. Christopher Tonetti as advisors and mentors.
Risk Labs, the company supporting our protocol development, raised a $4M seed round led by Placeholder with participation from Bain Capital Ventures, Blockchain Capital, Box Group, Coinbase Ventures, Dragonfly Capital, FinTech Collective, and Two Sigma Ventures.
The Risk Labs team works out of Soho, NYC and is hiring.
Trustless Tokenization + What’s Next
UMA is a platform for your financial innovation. Our first ideas revolve around what are calling trustless tokenization, a process that uses UMA contracts to create ERC20 tokens for synthetic crypto or real-world asset exposure. More details on Twitter:
We are looking for partners to launch the first trustless tokens using UMA infrastructure early next year. If this interests you, or if you are just curious to learn more, please:
- Email us: hello@umaproject.org
- Engage with us on Twitter @UMAprotocol
- Follow us here on Medium
- Sign up for early access at umaproject.org
Many thanks to Allison Lu, Chris Burniske, Paul Fletcher-Hill, and Stefan Cohen for their comments and edits.
