The Past and Present of UMA: Can ancient tokenized asset projects make a comeback?

It must have been a tough week for readers who are holding a full bag of coins. Over the past seven days, the total market value of cryptocurrencies has evaporated by 6.5%. However, a token associated with a protocol called UMA (Universal Market Access) has surged by 136% against the trend.

The Past of UMA

UMA (Universal Market Access) is a protocol built on Ethereum, founded by former Goldman Sachs employees in 2019. The first product on the mainnet was USStocks, an ERC-20 token that tracks the S&P 500, allowing users to invest in the US stock market through cryptocurrency assets.

In 2020, UMA created the first priceless token on-chain, $ETHBTC, which tracks the performance of $ETH against $BTC. If $ETH outperforms $BTC, the token value increases; otherwise, it decreases, enabling market participants to engage in relative market movements without holding both tokens.

Through UMA, you can also create a cryptocurrency that tracks the price of the Chinese yuan or launch a cryptocurrency that tracks Tesla's stock. "Priceless" is the key feature of this product, where "Priceless" does not mean invaluable but refers to not needing a price. Normally, synthetic tokens require oracles to track the value of collateral. However, UMA's synthetic tokens allow liquidators to interpret off-chain data to fulfill this task.

Following synthetic tokens, the protocol developed a USD-denominated yield token, $yUSD, a stablecoin variant with a fixed value of $1 at expiry, collateralized by pledging cryptocurrency assets. This is similar to what AAVE currently offers, where users can borrow a specific amount against collateral and repay the equivalent amount with increased value.

From UMA's past products, it's evident that they had a prototype of what oracle mechanisms are today. Through an effective MVP model, they found a favorable position in the market, showcasing the financial background and strong development capabilities of the UMA team, enabling them to continuously create valuable products in different fields.

The Present of UMA

UMA is currently focused on settling transactions for any asset on Ethereum and providing an oracle mechanism to track the price of any commodity or off-chain data, known as the Optimistic Oracle (OO).

UMA's oracle system consists of two crucial components: the Optimistic Oracle (OO) and the Data Verification Mechanism (DVM).

Unlike traditional oracles, the Optimistic Oracle assumes that the data provided by the proposer is correct and verifies this assumption through a verification mechanism. This mechanism allows the Optimistic Oracle to be applied in a wider range of fields beyond just price transactions.

The specific operation process of the Optimistic Oracle is as follows:

• Requester asks for answers to specific questions at a specific time, such as asset prices, temperature, sports match results, etc.
• Proposer responds to the request by citing off-chain data and must collateralize a certain amount of $UMA as security.
• All $UMA collateral holders vote, with the majority being considered correct.
• A dispute period follows, where anyone can challenge by collateralizing double the amount of the original proposer's $UMA.
• If the challenge is successful, meaning collateral holders vote to accept the challenger's proposal, the original proposer's collateral is forfeited, with some going to the challenger as a reward.
• If the challenge fails, the challenger's funds are forfeited, with some going to the proposer as a reward.
• Additionally, collateral holders who vote on the correct side receive token rewards provided by the protocol, allowing users who vote correctly to have more voting power in the future.

UMA ensures that the cost of disrupting the DVM is higher than the potential profit from disrupting the oracle, ensuring that data input through these tools will be reliable. Therefore, the Optimistic Oracle is known as a "human-driven truth machine."

Use Cases of the Optimistic Oracle

Currently, UMA is expanding in two major areas: prediction markets and insurance.

In the prediction market sector, the recently popular event prediction platform, Polymarket, uses UMA's Optimistic Oracle to determine event outcomes. Additionally, the risk management platform, Sherlock, employs UMA's oracle as the backbone of its insurance dispute system.

The emergence of oracle technology is due to blockchain needing information from the off-chain world. UMA's oracle provides this information and differs from traditional data providers (like MakerDAO and Chainlink) by offering a new liquidation mechanism, reducing reliance on a single data source, minimizing failure risks, and increasing data diversity.

Through the pricing mechanism of the Optimistic Oracle, combined with UMA's past design of price-less assets, this may become another solution for the future of RWA. It's worth keeping an eye on what new innovations UMA's magicians can conjure up.

Controversial Event: The Polymarket U.S. election gambling controversy, how was I caught?

What's Rising? MEV Killer Oval

UMA recently launched an update called Oval, seen by the community as an effective solution to the MEV problem. This collaboration with Flashbots has gained market favor, leading to an increase in the UMA token price.

In decentralized finance and lending protocols, oracles play a critical role as they provide off-chain price data to smart contracts. However, oracle data has a time lag, and in blockchain mechanisms, there's MEV, a front-running arbitrage tactic. Past oracles have been vulnerable to MEV attacks, causing protocols to incur fixed losses. Through Oval, UMA hopes to effectively extract value that the OEV oracle can provide and distribute it to protocol users and token holders.

$UMA Token Model

$UMA is mainly used for governance, allowing token holders to vote on UMA Improvement Proposals (UMIP) and price requests proposed by the DVM.

During the ICO, 2% of the tokens (2 million) were sold, founders retained 48.5% (48.5 million), DAO received 35% (35 million), and the remaining 14.5% (14.5 million) will be used for future sales. During each voting process, a currency inflation reward equivalent to 0.05% of the current $UMA supply is allocated to collateral holders who vote for the correct option, leading to an increase in token supply.

UMA's Market Performance

At IUL, UMA's initial price was around $0.2675, reaching an all-time high (ATH) of $43.37 in the trading market. During DeFi Summer, it experienced highs and lows, dropping to $1.16, a 97.3% decrease from its peak.

As of the time of writing, UMA is trading around $4.79, nearly quadrupling from its low, but still 89% below its ATH.

However, short-term market data indicates that many smart money holding UMA has been transferred to centralized exchanges, likely preparing to sell the news. Readers interested in trading UMA should be cautious of the risks.