Is UMA cryptocurrency a good investment?

UMA is an ERC-20 token used to govern the UMA protocol and to vote on the price of an asset when the DVM oracle is called to dispute a collateral liquidation claim.

While its initial supply was 100 million, it has no hard cap and can be inflationary or deflationary depending on two elements: the amount of value currently in the protocol (since the more there is, the more the token is bought and burned), and the amount of UMA being used to vote in the protocol (since there is a 5% inflation from tokens used to vote).

How does UMA work?

While UMA is conceptually complex, how it works is surprisingly easy to understand. At its core, UMA involves 3 elements: its framework for creating synthetic (read: derivative) token contracts on the blockchain (Token Facility), its Data Verification Mechanism (DVM, read: oracle), and its governance protocol.

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How does the DVM work in UMA?

UMA is very aware that there is no rule of law in the cryptocurrency space. This makes many elements within it prone to corruption, including oracles. To combat the possibility of the DVM being corrupted, UMA uses a simple metric: the cost of corrupting the oracle must always remain greater than the potential profit which could be made by doing so.

What entails is a three-step process wherein the cost of corruption (CoC) must be measured, where the profit of corruption (PoC) must be measured, and creating a mechanism where the CoC is always greater than the PoC. Since price the price the DVM oracle spits out is based on majority vote of other network participants (51%, requiring a minimum of 5% of all tokens to be used in voting), the cost of corruption is owning more than 51% of all UMA tokens, since these are used to vote on the price.

To assess the PoC, all smart contracts which are issuing synthetic tokens must report the potential profit which could be extracted from it if the oracle were to be corrupted. Adding the value of all assets in the various smart contracts on UMA provides the PoC.

To make sure that the CoC is always greater than the PoC, UMA buys and burns UMA tokens currently on the market to ensure that their value is always greater (specifically 2x) than the total amount of assets locked in the protocol. This is paid for using a tax which is levied on Token Facility Owners. The UMA protocol only charges what it needs to do this, no more, no less.

UMA Governance

When it comes to governance, UMA token holders have two responsibilities: to vote on the price of an asset when a request is given to the DVM, and to vote on changes and/or upgrades to the UMA protocol. Regarding these changes/upgrades, UMA token holders are able to introduce new assets (via the Token Facility smart contract), remove existing smart contracts which are not being used, and even shut down smart contracts in cases of emergency.