Oracles are vital services for the blockchain-based world and reliably relay real-world, off-chain information (that is, information that is not stored on a blockchain) to blockchain smart contracts. This information is important for everything from asset prices in decentralized finance (DeFi) to governance of decentralized autonomous organizations (DAOs). Put another way, oracles are the bridge between off-chain information and on-chain computation.
UMA Protocol provides oracle services to decentralized applications (dapps). By using smart contracts to create a model it calls an “Optimistic Oracle,” it aims to use economic incentives to verify data for use on-chain.
The protocol harnesses the UMA utility token to secure its Optimistic Oracle and to support governance of the UMA platform.
How was UMA developed?
UMA was conceived by Hart Lambur, who previously worked as an interest rate trader at Goldman Sachs and founded a portfolio management platform called Openfolio, which he sold in 2017. He founded UMA in 2018 with former Goldman Sachs Vice President Allison Lu. Lambur serves as the CEO of Risk Labs, which directs UMA’s development.
The original whitepaper for UMA was published in December 2018, describing the platform as a service that would offer financial contracts in the form of synthetic assets. Early on, the project focused on goals such as removing obstacles to financial markets, passing restrictions on short selling and leverage, and tokenizing financial risk on the blockchain.
However, a second whitepaper was released in April 2020 that detailed a shift in the project’s aims to its Data Verification Mechanism and oracle service based on economic incentives/security. This new documentation removed all wording involving “synthetic assets.” The same month, UMA conducted its initial DEX offering (IDO), releasing 2 million UMA tokens onto the market.
How does UMA work?
The Optimistic Oracle
UMA’s Optimistic Oracle (OO) uses smart contracts and various participants to retrieve data for the purposes of transmitting it on-chain. For instance, this might be necessary to ensure that a gold-backed stablecoin is able to be priced at gold’s real-world value.
In order to publish this information and ensure it is verifiable, the OO has four primary steps:
- An asserter proposes off-chain data to the system (like the price of a real-world, off-chain asset) and post a bond (such as 5000 USDC) as a financial incentive for other actors on the network to challenge the assertion.
- During a dedicated challenge period, disputers can also post a bond of equivalent amount to challenge the assertion put forth. If there are no disputers, then the assertion is assumed true. This is what makes UMA’s oracle “optimistic.”
- The Data Verification Mechanism (DVM) is initiated, where UMA token holders have a few days to vote on whether the assertion is true.
- The final judgment on assertion is determined by the DVM using the results of the voting process. The majority of the combined bonded assets (the USDC, in this case) are then paid to the correct party, whether it is the asserter or the disputer, and the remainder is sent to the protocol. Voters (UMA holders) are paid for their part in securing the OO.
The system is intended to incentivize users to correctly estimate real-world data as both asserters and disputers.
Uses for UMA Protocol
While the UMA Protocol can be used for many blockchain activities, its most-used activities involve:
- Governance – UMA can help DAOs validate their votes on proposals that guide their communities. Many DAOs use a service called Snapshot to record votes off-chain, and UMA provides a service called oSnap to settle these votes on the blockchain.
- Prediction markets – Whether it is sports betting or estimating the future price of various cryptocurrencies, prediction markets like Polymarket allow users to attempt to forecast events. This data must be verified on-chain by an oracle once it happens in the real-world.
- Tokenization of real-world assets – Brings real-world pricing data of assets to on-chain dapps. This may include non-smart contract assets like BTC or real-world assets like real estate, gold or equities.
- Cross-chain bridges – UMA can also be used to verify cross-chain data and works with the Across bridge to facilitates asset exchange among Ethereum and layer 2 solutions like Arbitrum and Optimism. UMA and Across work to ensure the stability of asset prices on these different chains.
The UMA Governance and Utility Token
The UMA token has two primary purposes. First, UMA holders can vote on proposals to guide the project. They also secure the Optimistic Oracle through voting on disputed assertions via the Data Verification Mechanism.
In early 2023, UMA also launched token staking, giving token holders the opportunity to receive incentivized staking rewards.
The initial supply of UMA was 100 million tokens, some of which were officially released on Uniswap in April 2020. Risk Labs Foundation deposited 2 million UMA and around $535,000 worth of ETH into a liquidity pool so users could trade for the tokens. About half of all tokens (48.5 million UMA) were allocated to Risk Labs’ founders and investors. Another 35 million UMA were distributed to developers and users of the network, and 14.5 million were reserved for future token sales.
Further UMA tokens were minted through the process of network participation (such as dispute voting). However, this changed when the second version of the DVM was released. UMA’s inflation rate stabilized over time, and newly minted UMA tokens are now rewarded to stakers at a fixed emission rate.
UMA Protocol Essentials
- UMA is an “optimistic” oracle that uses a data verification system to reliably bring real-world data to blockchain networks
- The Optimistic Oracle (OO) assumes that assertions about off-chain data are true. However, it uses economic incentives to allow others to dispute the assertions and ensure data validity
- The UMA token is used for platform governance and securing the oracle through decentralized voting processes
How to buy UMA
You can buy the UMA coin on Bitstamp. Sign up for a Bitstamp account and start trading UMA today!
Disclosure: UMA is not available in the US.