UMA Protocol

Learn about an “optimistic” oracle connecting web3 with a variety of off-chain data.

Overview

UMA protocol is a decentralized financial contracts platform that aims to provide universal market access to DeFi markets. Users can use the protocol’s contract templates to create synthetic tokens that represent & change in value with any non-synthetic asset in DeFi.

UMA consists of an optimistic oracle and various smart contract templates that are automatically secured by its oracle. UMA is the native token of the protocol.

History

UMA protocol was established by Risk Labs, a company founded by former Goldman Sachs traders Allison Lu and Hart Lambur in 2018. In April 2020, UMA held an initial DEX offering on Uniswap to fund the protocol launch. Risk Labs minted 100 million UMA and deposited 2 million tokens into Uniswap for the IDO.1

At the beginning of 2022, 35M UMA were transferred to UMA DAO, meaning that 35% of the original mint are under the stewardship of token holders.2

Product

Optimistic Oracle

An oracle is an entity that “bridges” or connects smart contracts to external resources or valuable off-chain information. As the external data that oracles feed on-chain changes, it can trigger predefined actions of a smart contract. 

UMA’s optimistic oracle is built to reduce the risk of data manipulation. The cost of manipulating UMA’s oracle is meant to be greater than potential profit earned from corrupting it, thereby eliminating any monetary incentive to corrupt the system. It is also designed to minimize both gas fees and the potential for data disputes.3

Key Performance Indicator (KPI) Options

KPI options are an incentivization mechanism introduced by UMA. These are designed to reward a protocol’s community for helping grow the underlying fundamentals of the protocol. 

Key Performance Indicator (KPI) options are synthetic tokens that will pay out more rewards if a project’s KPI reaches predetermined targets before the given expiry date, which usually aligns with an airdrop. Every KPI option holder thus has an incentive to improve the underlying metrics because their option will be worth more.4

Range Tokens

Range tokens are synthetic assets that allow DAOs to use their native token as collateral in exchange for access to funds in stablecoins. This means that DAOs aren’t required to sell off their native tokens to secure capital, rather they sell the right to buy the token within a set price range. Range tokens can protect DAOs from liquidation by limiting collateral at risk to a fixed amount.5

Success Tokens

Success tokens are another type of synthetic asset offered by UMA that enable DAOs to raise funds without having to offer discounts on their native token. Instead, DAOs sell success tokens to investors, and each investor receives a bonus call option with the success tokens. Both the token and its call option are locked until a particular vesting date. When that date is reached, investors can only cash out the call option if the price of the DAO’s native token has gone up.6

Governance

The UMA token is the protocol’s governance token and an integral part of the UMA ecosystem. It is used for voting on UMA Improvement Proposals (UMIPs), price requests, and disputes made to UMA's Data Verification Mechanism (DVM).7

Zapper Learn aims to provide factual, unbiased information about apps featured on our app page. However, you should always get curious and do your own research before interacting with any app. Ask yourself things like: Do I understand how the protocol works? How reliable has this protocol been historically? What is my tolerance for risk?
Networks
Governance Token
UMA
Audits
OpenZeppelin
Official Links
Website

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