UMA x Token Terminal: Interview with Allison Lu
In this blog series, we interview founders from the crypto space to learn more about them and the products they’re building. For our fourth post, we sat down with Allison Lu, the co-founder of UMA. UMA, which stands for Universal Market Access, is a protocol that enables users to create synthetic assets.
In this interview, we go through topics ranging from the team’s current product focus to future plans.
What is UMA?
UMA is an open-source “Priceless” financial contracts platform built on top of Ethereum. This infrastructure includes two components: a decentralized oracle service based on a Schelling Point design, and “Priceless” smart contract templates that can be used by third parties to create all kinds of new and interesting on-chain financial products.
Who is the team behind UMA?
Hart Lambur and Allison Lu are the two co-founders. We started working together in 2008 on the Goldman Sachs trading floor and started UMA in 2018. Since then, the full-time team as well as the community has continued to expand.
What specific issues did you want to solve with UMA’s priceless oracle design?
We believe that secure oracles are the single biggest problem facing DeFi scalability, security, and usability today. Ultimately, we believe that even the most well designed oracles are corruptible — both maliciously (pseudonymous on-chain identities mean that attackers can steal value without legal recourse) and non-maliciously (downtime, flash crashes, and other cases where human judgment is necessary).
The UMA Oracle, or “DVM” (Data Verification Mechanism) provides an economic guarantee for price resolution. Any contract using an oracle to resolve payouts is susceptible to oracle corruption, but the DVM mechanism of dynamic fees ensures that the cost to corrupt the DVM will always exceed the potential profit from corrupting it, thereby eliminating the economic incentive for corruption in the first place.
What are some less-known use cases for synthetic assets that you are excited about?
The most well-known use case in fiat, but a lesser-discussed use case in crypto is interest rates. Interest rates are a natural candidate for synthetic derivatives because they’re intangible and don’t otherwise “exist” outside of price indices for derivatives and bonds. Most retail borrowers prefer to have a fixed interest rate while most institutional lenders prefer floating interest rates. Synthetic interest rate products allow market participants to express their duration preferences. The market is potentially huge: in fiat, it’s a $500T+ market, orders of magnitude larger than any other asset vertical.
What are the biggest risks of synthetic assets that many people often overlook?
Every synthetic asset has some sort of pegging mechanism. BitMEX perpetual swaps, for example, use a funding rate every 8hrs to ensure that the value of its perpetual swap stays near the value of the bitcoin index. Dai has a dynamic stability fee and other system parameters.
In general, there is no guarantee that a synthetic asset will always trade at a price close to the target. Oil futures going to a negative price is a great example of the synthetic price becoming totally unhinged from the target price, even in a large and usually liquid market. Users should always look at the mechanism(s) enforcing that the synthetic price meets the target price to determine the safety of the synthetic asset, and determining whether the properties of the synthetic asset meet their needs.
What are the pros and cons of building financial infrastructure out in the open?
The best part is the community. Building in the open with a community to provide input results in greater creativity and coherence with other DeFi legos. Even in cases where the community input is off the mark, or the result of a lack of understanding of the system is good feedback: it shows us that we need to get better about how we communicate about our technology.
There is a dark side to this community. Takedowns and hot takes can earn the writer #cryptotwitter clout. Being able to sift through the noise to arrive at genuine community feedback can be time consuming and sometimes emotionally draining.
What are the metrics UMA is interested in tracking and why?
The value accrual mechanism for $UMA holders is the total PfC (profit from corruption) secured by the DVM. That is the top-line KPI we care about. On the path to increasing the top-line number, as an infrastructure provider, is the total number of developers/projects/builders that we get to help and experiment with. So our near-term KPI is around the number of entities building on top of our tech stack as well as the recipients of community token distribution awards.
How many synthetic assets can the UMA oracle eventually support?
There is no limit! An alternative question is how many disputes the DVM can support (because potentially many more assets can be supported if there are not frequent disputes). Accessing truly decentralized human judgment can be costly and burdensome. In its current form, the DVM does not work well if there are hundreds of disputes each month — either we’d have to work to reduce the number of disputes, or we’d have to work to make voting easier. This is a big part of what we hope to learn from being on mainnet this year: how hard is it to vote, and how often do votes need to occur? From there, we can work on optimizing the features that benefit our community.
UMA recently had a presentation with Balancer Labs. Can you talk about the synergies between UMA and Balancer (as well as potentially other protocols)?
One way to create perpetual tokens is to take a bunch of expiring tokens (May, June, July, etc.), and string them together to create a perpetually rolling contract. That’s what we’re working on with Balancer Labs, and it’s been a real pleasure to work with such a fantastic team.
In general, money legos is a huge benefit to building in DeFi. AMMs are available to reduce the market-making overhead in launching a new token. Stablecoins are conveniently available to reduce the financial engineering risk from creating a synthetic real-world asset that would otherwise be backed by ETH. Lending protocols are available to add yield enhancement to any trading strategy. The list goes on.
What is UMA’s edge against e.g. MakerDAO’s DAI-backed synthetic asset contracts?
Not all synthetic assets are created equal, and design decisions generally have tradeoffs that make them more or less suitable for various use cases. The mechanisms for liquidity, settlement, and maintaining the peg are all different. Without knowing the details of MakerDAO’s intended architecture for Dai-backed synthetic assets, I can’t say how UMA compares. I only know that UMA synthetic tokens have been optimized for minimizing oracle usage and ongoing governance oversight.
How do you approach team-building and hiring for a crypto protocol venture?
A dedicated core team is everything when building a crypto protocol. We’re not only a product team solving a near-term problem for DeFi power users. We’re also believers in the freedom enabled by the power of permissionless risk transfer. We seek out the best technical talent, who are in it for the long haul.
Who are the 3 most important stakeholders of the UMA community?
$UMA-holders. Synthetic product users. Synthetic product arbitrageurs. In that order.
How will the world be different once UMA and crypto have won?
The fiat financial system does not give its users many choices. Sure, you can choose between Citibank and WellsFargo. But you can’t opt out of the dollar. It doesn’t give its users much control. Sure, you can change your account settings. But the ultimate asset custodian is the banks and they decide if you can access your own money. It doesn’t provide its users equal access. Sure, most people living in the US can access brokerages, but that access lives behind private APIs and one-size-fits-all KYC.
Inside a permissionless financial system, not all options will be good and private key management is hard… but we will all have access, choice, and control in a way that was never possible before.
We really enjoyed doing this interview with Allison — and we’re looking to do many more similar interviews in the future. DM us on Twitter in case you would like to chat with us or if you know someone we should be in contact with.
The authors of this content, or members, affiliates, or stakeholders of Token Terminal may be participating or are invested in protocols or tokens mentioned herein. The foregoing statement acts as a disclosure of potential conflicts of interest and is not a recommendation to purchase or invest in any token or participate in any protocol. Token Terminal does not recommend any particular course of action in relation to any token or protocol. The content herein is meant purely for educational and informational purposes only, and should not be relied upon as financial, investment, legal, tax or any other professional or other advice. None of the content and information herein is presented to induce or to attempt to induce any reader or other person to buy, sell or hold any token or participate in any protocol or enter into, or offer to enter into, any agreement for or with a view to buying or selling any token or participating in any protocol. Statements made herein (including statements of opinion, if any) are wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader or any other person. Readers are strongly urged to exercise caution and have regard to their own personal needs and circumstances before making any decision to buy or sell any token or participate in any protocol. Observations and views expressed herein may be changed by Token Terminal at any time without notice. Token Terminal accepts no liability whatsoever for any losses or liabilities arising from the use of or reliance on any of this content.
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