Crypto synthetics has been a game-changing development in the market. It enables more people (possibly anyone) to access traditional financial instruments around the world, without intermediaries.
Crypto synthetic assets refer to the tokenized form of traditional or digital asset classes that derive their value from the underlying asset or index. It replicates the features of the traditional asset and produces similar financial effects, but the only difference is that they are on the blockchain.
In simple terms, crypto synthetic assets are one form of traditional asset. They operate on smart contracts that track the price action of the underlying asset.
In this edition of Spotlight, we will discuss UMA, a leader in the crypto synthetics segment, focussing on how it is unique compared to other crypto synthetic platforms.
- Coin Rank: #143
- Coin Market Capitalization (as of 29th April 2022): $361.7 million
- Coin Economics: Inflationary
- Initial Coin Supply: 100 million UMA
- Coin Total Supply: 107 million UMA
- Coin Circulating Supply: 101 million UMA
Technical Analysis: UMA Price Analysis
Analyzing the daily chart, we can see that UMA is experiencing strong support at the $5.45(₹415 approx) level. The Relative Strength Index (RSI) is also suggesting a reversal of momentum in the short term. It needs to break above the highly resistive $6.73 (₹511.5 approx) level with strong buying momentum to sustain the positive move. A break above the 50 EMA* slope will be a positive development for the market.
If it breaks below the $5.45 (₹415 approx) level, it could even drop below the $5 (₹380 approx) level. Broader market moves are indicative of the future price momentum of the UMA coin.
*Exponential Moving Average
A Brief About UMA Coin
UMA stands for Universal Market Access. It is an open-source protocol based on the Ethereum blockchain. The protocol was founded by a former Goldman Sachs trader with a computer science background, Hart Lambur, in 2017.
It allows developers to create and issue crypto synthetic assets. One example of such an asset is, a tokenized version of Apple stocks, which can be exchanged freely across the world without restriction, helping in better price discovery.
Not just stocks, UMA protocols allow developers to digitize any asset that has real-life value, including futures, Contracts for Differences (CFDs), crypto assets, and other financial derivatives.
So, in crypto synthetic form, you don’t get ownership of the asset. However, it is possible to profit from trading that asset as it mimics the price action of the underlying asset.
How Does the UMA Coin Work?
The framework for the UMA coin consists of three key elements: the token facility, its Data Verification Mechanism (DVM), and the governance protocol.
Token Facility: This refers to the smart contracts that enable the creation of synthetic tokens representing an asset. Anyone can create a synthetic token by meeting criteria along the following parameters:
- The Price Identifier (refers to the price of the underlying asset);
- The Expiration Date (the date at which the contract is settled); and
- Minimum Collateralization Requirement (collateral requirement to create synthetic assets)
The developer needs to put up funds as collateral in smart contracts to create and issue crypto synthetic assets.
The person who puts up the collateral is called a token sponsor. For example, if a developer wants to issue synthetic gold, the smart contract will require the developer (token sponsor) to deposit some collateral to issue synthetic gold.
Data Verification Mechanism (DVM): Unlike other crypto synthetic platforms that use blockchain oracles to update the prices of synthetic assets, UMA uses a data verification mechanism or a DVM.
With the others, the blockchain oracles used keep a check on the collateralization level and are responsible for liquidation, if the collateralization level falls below the specified criteria. But in UMA, the token holders are incentivized to check on the token issuer and ensure that the synthetic assets are properly collateralized. The token holders check the collateralization level locked in the smart contract and calculate the collateralization requirements. If insufficient, they can call for liquidation.
UMA Governance Protocol: UMA governance protocol plays a vital role in the smooth functioning of the UMA ecosystem.
UMA token holders who have staked their coins for network governance can vote on the prices of synthetic assets and UMA improvement proposals. The protocol incentivizes holders by issuing new coins, distributed proportionally to the percentage of staked coins.
UMA has an inflationary tokenomics, meaning there is no hard cap on the supply of UMA tokens.
In the first-ever initial decentralized exchange offering on Uniswap, in April 2020, out of the 100 million initial coin supply, only 2 million UMAs were sold to the public. The remaining 48.5 million were reserved for founders, 35 million were allocated to developers on the network, and 14.5 million were reserved for future sales.
And as far as the inflation or supply of tokens goes, those who vote on governance proposals are rewarded with new tokens, making the current inflation rate going around 5%.
UMA Future Growth Potential
In the DeFi ecosystem, crypto synthetic assets are an emerging segment with tokens worth millions of dollars staked across various crypto synthetic platforms. For instance, the total value locked in the UMA protocol has exceeded $38 million. Similarly, on SNX, another crypto synthetic asset platform, the total value locked on the platform has crossed $200 million.
If you look at the global derivatives market, the market UMA protocol is targeting is worth anywhere between $500 billion to $1 trillion. And it will continue to grow. Therefore, a huge growth potential exists for tokens involved in issuing crypto synthetics, including the UMA coin.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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