UMAUSD
UMA / U.S. dollar
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UMA is an optimistic oracle (OO) that can record information onto a blockchain. UMA's OO secures a diverse ecosystem of Web3 applications, including cross-chain bridges, insurance protocols, prediction markets, and customizable DAO tooling products. The UMA architecture establishes a framework for creating synthetic assets on Ethereum. This is accomplished by combining two different components: A framework for designing self-enforcing priceless financial contracts A decentralized oracle called a Data Verification Mechanism (DVM) Priceless DeFi Contracts According to UMA, priceless financial contracts are contracts that can function without the need of on-chain price feeds, and attempt to avoid exposure to oracle attacks by minimizing their use as part of the protocol. UMA accomplishes this by introducing a generalized framework to create financial contracts that can be defined between two counterparties with mutually agreed economic terms, termination terms, and margin requirements. Additionally, the contracts are designed with mechanisms of liquidation and dispute resolution that incentivize counterparties to properly collateralize their positions. Oracles are only used when a liquidity dispute needs to be resolved. Every UMA contract consists of 5 core components: Public addresses of both counterparties (makes and taker) Margin accounts for both counterparties Economic logic to calculate the net present value (NPV) of the agreement Functions to maintain margin balances, terminate or settle the contract A choice of oracle for data verification purposes When a contract is created, counterparties are required to post the minimum required margin balance to their respective margin accounts. The maker and taker are free to add or withdraw funds from their margin accounts at any time as long as the agreed minimum balance is met to avoid early termination or default penalties. The economic logic is recorded in the code of the contract. This code is used to calculate the net present value of the agreement in order to track what is owed to either the maker or taker. Every time the economic terms (NPV) of the agreement are recalculated, the contract moves the appropriate balance between the margin accounts reflecting the price changes of the reference asset. In most cases, counterparties are incentivized to contribute more than the minimum required balance since the contract will terminate if the NPV of the agreement causes either party's margin balance to drop below the minimum amount. As a further incentive to maintain sufficient margin, contract participants can agree on a default penalty to be paid on top of the NPV in the event of default. Trustless Tokenization Priceless financial contract templates can be used to create novel financial products. Among the wide array of opportunities, UMA has written one to create synthetic tokens. Synthetic tokens are created by fully collateralizing one side of an UMA contract and then minting tokens backed by that collateral. This allows for the creation of ERC-20 tokens that represent synthetic exposure to the contract's reference asset. Examples of synthetic tokens created using UMA contracts include ETHBTC, a token that tracks the ETH/BTC ratio, and USStocks, a token representing synthetic ownership of the S&P 500 stock Index. Data Verification Mechanism (DVM) UMA's Data Verification Mechanism is the system's oracle design. The team believes every blockchain oracle is vulnerable to attacks, which means every smart contract that relies on off-chain data is susceptible to corruption. For this reason, UMA designed an "honest" oracle with economic incentives to discourage bad behavior. The system accomplishes this by introducing a framework where the cost of manipulating the oracle is greater than the potential profit from corruption. In other words, the Cost of Corruption (CoC) must always be greater than the Profit from Corruption (PfC). To verify this inequality holds true at all times, the system follows the following steps: Measure the Cost of Corruption (CoC) Measure the Profit from Corruption (PfC) Enforce a mechanism to maintain CoC PfC To compute the CoC, the DVM relies on a voting system with tokenized voting rights. When a price dispute needs resolution, UMA token holders vote on the disputed prices and are rewarded for voting honestly and penalized otherwise. Since 51% of the available voting tokens is required to control the output of the DVM, the Cost of Corruption can be estimated as the total cost to control 51% of available UMA tokens. The PfC of the system is calculated via contract registration. All contracts using the UMA system must be registered with the DVM and are required to report the maximum profit, the contract's PfC, an attacker would be able to extract if they control the off-chain inputs to the contract. With this information, the system computes the PfC of the overall DVM system as the total sum of the PfC values computed and reported by each individual financial contract. Lastly, the system enforces the CoC PfC inequality through a variable-fee policy. Enforcing the inequality requires keeping the cost of acquiring 51% of the voting tokens higher than the system-wide PfC. The DVM achieves this by controlling the token supply through token buybacks when the CoC approaches the PfC. All purchased tokens are burned, increasing the token value and therefore increasing the CoC. The system levies a fee on all contracts to raise the funds needed to conduct the buybacks.