Besides stocks and currencies, how much imaginative space can the DeFi protocol UMA create in synthetic assets?
Synthetic assets developed based on the UMA protocol take into account fun or user needs, which may be what "synthetic assets" should look like, rather than being constrained by the imagination of "oracles."This article is from Chain News, authored by Pan Zhixiong.
Although the concept of synthetic assets has grown rapidly in the decentralized finance (DeFi) space over the past two years, the current DeFi synthetic asset protocols are still generally limited to simple synthetic assets like "stocks" and "cryptocurrencies."
In fact, "synthetic assets" can bring various tradable data onto the blockchain to support users with trading needs for risk hedging, speculation, investment, and even building marketing tools similar to options structures. The DeFi protocol UMA explores the possibility of completely opening up the imagination of DeFi synthetic assets under the premise of "oracle minimization."
As a native concept of cryptocurrency and blockchain, the most well-known synthetic asset protocol is Synthetix, which once had a total market capitalization exceeding $4 billion. It uses oracles to bring off-chain asset data onto the chain and then achieves price anchoring through extremely high collateralization rates. UMA, on the other hand, has designed a completely different synthetic asset mechanism that minimizes the use of "oracles" by introducing game theory, which may be one reason why UMA can design more diverse synthetic assets.
Currently, Synthetix has over $2.3 billion locked in.
On the other hand, as a protocol, the creation of various synthetic assets can be achieved by other third-party teams, so there are more and more collaborators in the UMA ecosystem, giving rise to various peculiar synthetic assets such as "Bitcoin market cap ratio," "structured financial products," and "KPI Options."
UMA's Synthetic Asset Mechanism
UMA stands for Universal Market Access, originally positioned as a "synthetic asset protocol," later adding "a decentralized finance contract platform." From UMA's vision, it aims to solve the problem of users accessing various other markets or assets on the blockchain.
UMA co-founder has stated that UMA achieves financial contract security through three points: price feed-free financial contracts, a data verification mechanism based on governance tokens for economic guarantees, and an asynchronous oracle delay mechanism.
The basic philosophy of UMA's design is price feed-free, minimizing the use of on-chain oracles to reduce the frequency and attack surface of oracle attacks, primarily achieved by introducing two participants: "liquidators" and "challengers," essentially a game-theoretic mechanism.
Minimizing the use of oracles
This mechanism assumes that the collateralization rates of synthetic token positions are sufficiently repayable. Once the price of the collateral fluctuates and the collateralization rate becomes insufficient, anyone can liquidate based on off-chain prices and earn profits, which is the role of the "liquidator." If there is a dispute over the liquidation, another role, the "challenger," needs to be introduced.
If a challenger disagrees with the liquidation, they can raise a dispute.
Before initiating a liquidation, the "liquidator" must collateralize a certain amount of funds, and the "challenger" also needs to collateralize a certain margin. Therefore, if the final ruling proves the "challenger" is correct, the "challenger" can receive a penalty paid by the liquidator. Conversely, if the "challenger" is proven incorrect, they will lose their collateralized margin.
This game-theoretic mechanism ensures that participants have sufficient economic incentives to engage in the game, ultimately ensuring that prices are reliable and trustworthy.
This is somewhat similar to a court system in reality, which only comes into play when disputes arise. Two parties to a contract will never need to use the court system as long as they both comply with the law; only when a dispute occurs will the court's ruling be necessary.
UMA redefines "oracles" as a court dispute resolution system, believing that if these disputes cannot be resolved through the mechanisms written into the contract itself, then oracles should serve as a backup for resolving disputes.
For more details on how UMA operates, refer to this article: "Is Human-Centric Game Design the Safest? UMA Founder Details How to Defend Against Flash Loan Attacks"
Attracting Over 7 Ecosystem Partners in 4 Months
The most significant difference between UMA and Synthetix in creating new types of synthetic assets is that Synthetix only requires oracles to provide prices, while UMA requires professional teams to develop specific smart contracts within the UMA protocol framework to launch new synthetic assets.
Thus, UMA's advantage lies in its ability to create more customized and interesting synthetic assets, while Synthetix's advantage is that the technical difficulty of launching new assets is lower. Because of this, UMA has launched initiatives to incentivize developers to create synthetic assets (financial products) to encourage faster development of the protocol ecosystem.
More and more DeFi protocols are beginning to engage in deep cooperation with UMA, and there are also teams dedicated to developing new types of synthetic assets for UMA's ecosystem.
uLABS: Providing Best Practices for the UMA Protocol
The first-party team is uLABS, a new organization formed by UMA itself last November, dedicated to designing financial products and providing some foundational ideas and best practices for the ecosystem, which can later be migrated to other teams for iteration and development.
UMA's technical promoter Sean Brown and CFO Kevin Chan will drive uLABS to deploy new products on the mainnet. uLABS will first launch the token uGAS to track Ethereum Gas prices, allowing for hedging and speculative activities. Subsequently, uGAS will be transferred to other teams for management.
BadgerDAO: Building BTC-Based Synthetic Assets Using UMA
BadgerDAO is a decentralized organization focused on bringing Bitcoin into DeFi. Through collaboration with UMA, they have achieved yield dollar products and even proposed to implement specific liquidity pool functions in conjunction with SushiSwap and UMA or to conduct joint incentives.
Yam: Collaborating to Launch a Derivatives Trading Platform
The DeFi project Yam Finance originally aimed to develop a stablecoin with an elastic supply mechanism based on the algorithmic stablecoin protocol Ampleforth, adjusting for inflation or deflation based on market conditions, aiming to maintain the price of each YAM token at $1.
As Yam gradually faded from the DeFi community, they decided to collaborate with UMA to launch the DeFi derivatives trading platform Degenerative Finance and hand over the futures contract uGAS, developed by uLABS to track and hedge Ethereum Gas fees, as the first product.
Domination Finance: Focusing on Bitcoin Market Cap
Domination Finance is also a brand new startup team, and its name "Domination" comes from a term related to their product: BTC Domination (Bitcoin Market Cap Ratio). Therefore, the products they build using UMA are designed to track the Bitcoin market cap ratio token BTCDOM and the corresponding altcoin market cap ratio ALTDOM, with a series of related products to be gradually launched.
OpenDAO: Minting Stablecoins with Project Tokens
Based on UMA and the cross-chain protocol Ren Protocol, OpenDAO focuses on minting any token into stablecoins, starting with the USD stablecoin USDO. According to the official website, OpenDAO's investors include Signum Capital, MoonWhale, TRG Capital, and X21 Digital.
Jarvis: Wallet and Exchange Entry
Jarvis plans to launch a cryptocurrency exchange and wallet, allowing end users to directly purchase various assets, part of which can be realized through the UMA protocol.
Perlin: User Interface and Entry
PerlinX's V3 version will collaborate deeply with UMA, serving as the frontend entry for the UMA protocol, enabling a series of functions such as asset minting, trading, and staking.
What Other Possibilities Do Synthetic Assets Hold?
In addition to the gradually increasing ecosystem partners, it is worth noting what real-life data UMA can transform into synthetic assets on-chain.
For example, financial products like "Tesla" stock prices, "BTC" prices, and "Euro" prices are already supported by many synthetic asset protocols, and UMA can support them as well. However, to reflect the uniqueness of the UMA protocol, the team has been trying out quirky synthetic assets from the beginning, such as issuing a poop coin (Poopcoin) and tracking 3,000 instances of poop in the Bay Area within a month.
Of course, this is purely an entertaining marketing activity, but the synthetic assets developed based on the UMA protocol indeed consider fun or user needs, which may be what "synthetic assets" should look like, rather than being constrained by the imagination of "oracles."
uGAS: Hedging Against Rising Transaction Costs Due to Ethereum Network Congestion
uGAS is pegged to the Gas prices of the Ethereum network, which can reflect the current transaction congestion and demand on the Ethereum network. Initially developed and promoted directly by uLABS, it will later be transferred to Degenerative Finance for management.
Since the Ethereum network was "occupied" by various DeFi protocols last year, Gas prices have remained at historical highs. Although there have been significant fluctuations, the overall trend has been upward, leading to many low-value transactions being squeezed out of the Ethereum network.
Thus, uGAS can help users hedge against the gradually rising Gas prices, reducing the risk of future increases. At the same time, many people may believe that Gas prices will not continue to rise, providing liquidity for users with hedging needs. uGAS can match the demands of these two groups.
Structured Financial Products: Replicating Traditional Financial Product Structures
uLABS recently proposed a method to build decentralized "structured products" using UMA and is seeking teams to help realize it.
In traditional finance, retail investors can passively obtain risks and returns similar to derivatives by purchasing structured financial products, among which dual-currency products are one of the most关注的结构化产品之一.
uLABS claims that dual-currency products have become popular in cryptocurrency exchanges, allowing users to deposit ETH or BTC and sell call options to limit upside risk, thereby obtaining high returns. uLABS states that this functionality can be replicated through UMA's "Expiration Synthetic Token Contract" (EMP), but modifications to the EMP contract are needed before launching on the mainnet (currently, it does not support depositing two collateral types in one contract), so development and auditing are required, and the community is also encouraged to provide more feedback based on this idea.
KPI Options: Project Incentive Tool
Many protocols or DeFi projects have their own metrics (also known as KPIs) that reflect the scale or progress of the project, such as commonly used TVL (Total Value Locked), number of unique users, trading volume, etc.
Therefore, UMA cleverly combines the potential needs of project parties for KPIs and designs an incentive tool in the form of options, allowing token holders to help the project achieve certain KPI metrics more quickly. If the predetermined goals are met before a given expiration date, they can receive more rewards.
For example, UMA can design a "KPI Option" targeting the TVL metric to incentivize the growth of UMA protocol's locked value. UMA can airdrop such KPI options to whale users or core DeFi players, and if the TVL meets the goals set by the option on the expiration date, the holders of the KPI options can unlock and exchange for UMA tokens.
Bitcoin Market Cap Ratio: A Tradable Macro Indicator
The Bitcoin market cap ratio has always been one of the most frequently mentioned indicators in macro analysis within the industry, and many professional analysts build various investment strategies based on this indicator.
If such strategies are indeed effective, users can incorporate their own token investment strategies along with the Bitcoin market cap ratio as an important trading indicator to hedge against risks arising from fundamental changes due to fluctuations in this indicator.
The startup team Domination Finance is the developer of this indicator. They have developed the token BTCDOM to track the Bitcoin market cap ratio, as well as the corresponding altcoin market cap ratio ALTDOM, with a series of related products to be gradually launched.
Stablecoin Assets: Minting Stablecoins from Any Asset
Stablecoins on the blockchain are generally generated based on specific crypto assets as collateral or through off-chain physical assets as collateral. OpenDAO hopes to expand the scope of this to allow any crypto asset, stock, or off-chain asset to serve as collateral for on-chain stablecoins.
Thus, OpenDAO needs UMA and Ren Protocol as the foundational components to realize this functionality. UMA implements synthetic asset business, while Ren Protocol enables cross-chain asset business.
According to the official website, the project's first phase plans to use on-chain liquid assets as collateral to generate the USD stablecoin USDO, the second phase plans to use off-chain liquid assets as collateral (such as Apple and Tesla stocks), and the third and fourth phases plan to use off-chain real estate, equity, etc., as collateral.
Stablecoin Price Spread: Enhancing Stability of Cross-Chain Assets
A project called Zelda.Cash constructs synthetic assets based on stablecoin price spreads through the UMA protocol, allowing users to create STABLESPREAD positions. STABLESPREAD is a synthetic asset used to track the price spread between a basket of stablecoins on ETH and other stablecoins on different blockchains.
According to the official documentation, if users believe that non-Ethereum stablecoins (such as UST, BUSD) are priced better than Ethereum stablecoins (such as USDC, USDT), they can profit by purchasing STABLESPREAD; conversely, they can sell it.
This project is developed by an anonymous team called YouMyChicFilA, which also has another project named Mario Cash, utilizing the UMA protocol to synthesize renBTC into BCH.
