Introduction

What is UMA?

Universal Market Access (UMA) is an optimistic oracle, an oracle that assumes the data it’s given is true unless disputed, that allows for arbitrary types of data to be securely brought on-chain. Some of the current projects that use UMA are cross-chain bridges, insurance protocols, custom derivatives, and prediction markets. UMA is faster than most other Oracles and the price data can be provided by anyone.

How does UMA work?

UMA uses Optimistic Oracle to allow contracts to request and receive price information. Optimistic Oracles enable contracts to get this price information within a predefined amount of time. If a dispute is raised with the validity of the information, a request is sent to the Data Verification Mechanism (DVM), a process where UMA token holders vote on the accuracy of the refuted data, and is disputed for a 48-96 hour period.

What is an Optimistic Oracle?

An Optimistic Oracle is a system that is designed using incentives to reach consensus about real world data. The system works in these five steps:

1. Requestor asks for data and provides the system with these inputs:
   1. data it wants
   2. the time the data is being requested
   3. the reward token and quantity offered for a successful fetch of the data
2. Proposers post a monetary bond and provide data and a source to the Requestor.
3. Disputers can refute the data by posting data from an alternate source within a liveness period.
4. If the Disputers did not refute the data, the data is sent to the Requester and the Proposer keeps the reward.
5. If the Disputers did refute the data, it will be submitted to UMA’s DVM and resolved after a 48-96 hour voting period. If the data the Proposers submitted was deemed to be incorrect, their bond can be taken.

How does the UMA token interact with the protocol?

In the event of a dispute, a price request is submitted to the DVM which proposes a vote to UMA tokenholders. The vote will finish after a 48-96 hour voting period, resulting in a resolved dispute. If the DVM concludes the Proposer or Liquidator was correct, the Disputer will lose its dispute bond and the Liquidator or Proposer will be rewarded. This function is important because it is a disincentive to malicious disputes and puts the final decision in the hands of the people who are economically vested in having the correct or truthful decision being made.

UMA can be used for a variety of purposes on the UMA platform itself. Using the UMA token, users can vote for UMA improvement proposals and earn rewards. In addition to these uses the UMA token enables the Optimistic Oracle to remain secure utilizing a fully decentralized and permissionless method. UMA's DVM is designed by using the UMA token to provide an economic guarantee around the cost it would take to corrupt the oracle and the profit someone would receive. It does this by ensuring the price to obtain 51% of UMA tokens to vote in the DVM is greater than the profit from corrupting the DVM. The protocol maintains this economic guarantee by buying token supply off the market and burning them if the value secured by UMA is greater than 51% of the value of the UMA tokens. The profit from corrupting the DVM is calculated by the value of assets it’s Oracle are securing on chain.

UMA Partnerships

UMA has partnered with over 100 defi projects to help bring them reliable price data from off-chain to on-chain smart contracts. The projects that UMA have partnered with are primarily projects built on Ethereum or on one of its layer 2 blockchains, such as Optimism. Overall, these projects that UMA is partnered with have a combined TVL of  ~$100 Million as of June 2022.

Across

Across is one of the largest users of UMA Optimistic Oracle and is currently the only bridging protocol supported by UMA. It uses UMA to determine the price of assets in their liquidity pools when swapping assets from one chain to another. Across protocol implements a bridging method that combines UMA's Optimistic Oracle with bonded relayers and single-sided liquidity pools to provide transactions from rollup chains to Ethereum mainnet. Currently, Acoss protocol has ~44 Million of TVL locked in its single sided liquidity pools.

Sherlock

Sherlock is a risk mitigation / insurance protocol. It seeks to provide users with affordable coverage for smart contract exploits. Currently, the three big services that Sherlock provides are 1) audits from leading security firms and independent security experts, 2) bug bounties paid for by Sherlock, and 3) smart contract coverage for on-chain exploits. These services are very helpful for a project that is aiming to mitigate risk. Sherlock is currently holding ~$21 Million of locked value in their protocol.

UMA Competitive Landscape

UMA is currently in competition with Chainlink, Band Protocol, and API3 to create partnerships and provide reliable data to smart contract projects. With over 100 partnerships, UMA is one of the market leaders, with Band Protocol and API3 having 35 and 27 partnerships respectively. Chainlink, however, is the leader in the space with over 600 active partnerships. Although UMA is not in the lead in the number of partnerships, it has two major technical advantages over Chainlink, Band Protocol, and API3. First, different from the other protocol, the user providing the data on UMA must post a bond and be financially tied to the correctness of the individual piece of data. Second, Optimistic Oracle allows the protocol to have a much faster response time while the data is uncontested. Over the past year, UMA contracts have operated optimistically, and we have seen less than 5 legitimate disputes.

There has been an exponential growth of smart contract development over the past two years. Many of these companies need a way to get real-world information — such as market prices, weather information, location data and exchange rates — from external sources, bring this data onto the blockchain, and allow smart contracts to act upon them. All companies that need this service will need to partner with a company such as UMA, Chainlink, Band Protocol, and API3. The rapid growth of smart contract development provides an incredible opportunity for UMA and the other oracle services to gain more partnerships and provide data to new and upcoming projects.

How does UMA benefit its partners

One of the unique ways UMA provides value to communities that other oracle protocols do not is through its Proposer role. Rather than giving all of the economic value to an oracle like Chainlink, anyone can post an answer on the chain to receive a portion of the oracle fee, and only if the answer is wrong will someone dispute it. This allows community members of a protocol to participate directly in the oracle feed of a project they support and earn rewards for it. In addition to community participation, UMA allows for much lower oracle fees due to its extremely low dispute rate. This low rate allows almost all requests to be executed extremely fast.

Useful links

https://www.gemini.com/cryptopedia/what-is-chainlink-and-how-does-it-work

https://docs.umaproject.org/protocol-overview/example-projects

https://www.apollocap.io/developer-activity-report/

https://defillama.com/protocol/across

https://across.to/transactions

https://coinyuppie.com/uma-has-gone-live-with-optimistic-oracle-how-does-it-work/