What is UMA?
Universal Market Access — often referred to as just UMA — is a protocol for the creation of synthetic assets based on the Ethereum blockchain launched in December 2018. Synthetic assets are a class of assets that represent different, underlying assets and have the same value. Specifically, UMA allows users to design and create self-executing/enforcing financial contracts secured by economic incentives and run them on the Ethereum blockchain. As such, the system consists of two parts: priceless financial contract templates used by developers to create synthetic assets, and a decentralized oracle mechanism. This Optimistic Oracle, known as the Data Verification Mechanism (DVM), helps settle disputes by providing the price of an asset when network participants dispute the value of a collateral backing a synthetic token.
The Risk Labs Foundation supports UMA’s protocol development. The founding community members consist of alumni of Google, Goldman Sachs, venture-backed startups, and economics doctoral programs. The total supply of UMA is capped at 101,172,570 tokens. The Risk Labs initially created 100,000,000 tokens. Approximately, 48,500,000 are held by the Risk Labs founders, early contributors, and seed investors all subject to a multi-year vesting period. On April 29, 2020, UMA deposited 2,000,000 of their tokens into a Uniswap liquidity pool. 35,000,000 of the tokens will be distributed to developers and UMA users while the remaining 14,500,000 are reserved for future token sales.
What is the UMA token?
UMA is an ERC-20 token that serves primarily as a governance token. Decisions on how UMA operates and evolves over time are made by its holders. Holders can earn rewards for voting on price requests from financial contracts using the DVM & for governing the UMA ecosystem by voting on parameter changes and approving system upgrades. Token holders have a say on what types of contracts access the system and which asset types are supported. Voter participation is incentivized with an inflationary reward equal to 0.05% of the current UMA supply is distributed among active voters proportionate to their current stake.
In November 2020, UMA introduced a Developer Mining incentives program, which allows developers to earn ownership in a network that they help create. The Risk Labs Foundation committed to paying out 50,000 UMA tokens weekly as rewards for developers who build synthetic assets on the platform. The rewards are calculated based on the total value locked (TVL) in the newly created financial contracts.
How does UMA compare to Bitcoin?
UMA differs from Bitcoin in a few key ways.
First, UMA is an ERC-20 token, meaning it is a token that runs on—and is backed by—the Ethereum blockchain. This means that UMA does not have its own miners. Ethereum miners perform the task of processing and validating UMA transactions, just like how Bitcoin miners process and validate bitcoin transactions.
The second major difference between UMA and Bitcoin is their age. UMA was launched in December 2018 compared to Bitcoin’s 12 or so years, which means it’s less proven, less distributed, and has a significantly smaller market value than Bitcoin.
Additionally, the Bitcoin blockchain does not perform any other functions besides processing transactions. UMA, however, allows developers to use the Ethereum blockchain to create and design self-executing/enforcing financial contracts.
Similar to Bitcoin, a malicious participant or group of participants who gain enough control could negatively impact the value of the asset. If one person or an aligned group of UMA holders decided to manipulate its development, they could draft a malicious proposal and vote it through (similar concentration risk to a 51% attack on the blockchain.) This risk is much higher for an asset like UMA that has such a limited supply of tokens.
Just like Bitcoin, UMA is decentralized. No single entity maintains the UMA network, meaning that the token is divided between a potentially unlimited number of users, none of whom have ultimate control over the system.
However, it should be noted that, although UMA is different from Bitcoin, it is far from independent from it.
Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that UMA will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) And if Ethereum, the coin that powers the blockchain that supports UMA crashes, then UMA’s price could be impacted. However, if UMA crashes, Bitcoin may be less likely to get hurt by virtue of its size.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about UMA, including an opinion that UMA is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of UMA prior to making it available on Wealthsimple Crypto and has concluded that UMA is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated UMA based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of UMA, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created UMA;
- The supply, demand, maturity, utility and liquidity of UMA;
- Material technical risks associated with UMA, including any code defects, security breaches and other threats concerning UMA and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with UMA, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of UMA.
Like all other crypto assets, there are some general risks to investing in UMA. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, UMA presents an elevated short history risk and an elevated concentration risk. Further, the UMA community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of UMA have no recourse to UMA or Wealthsimple if UMA declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading UMA. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.