Memes have dominated the past year with GameStop (NSDQ: GME) and Dogecoin among the two best performing assets. Dogecoin has even spawned knockoffs as the Shibu Inu coin was recently added to Crypto.com and quickly surpassed $5 billion in market capitalization. Yes, you can pretty much create a profitable asset out of anything these days as long as you have a story or following behind it.
UMA is a cryptocurrency where developers can create a network of synthetic assets with contracts that can be drawn up based on anything with an underlying index or value, similar to how contracts for difference (CFDs) trade in Europe. No, UMA isn’t named after the actress from Pulp Fiction — it stands for Universal Market Access, and the developers behind the project want to use it to make markets more accessible, fair and secure.
What is UMA?
UMA runs on the Ethereum blockchain and creates a protocol to secure something called a “priceless contract” A decentralized global network governs the protocol, and members have diverse backgrounds (finance, tech, economics, etc). Developers use the priceless contracts to create synthetic assets or contracts that track the price of some underlying asset like a stock index, commodity price or value of another cryptocurrency.
If it sounds to you like a derivatives network, you’re a quick study. UMA allows investors and traders to create contracts similar to those traded on futures and options markets. By removing barriers to entry, UMA opens the world of derivatives up to more traders.
Two key terms to understand when discussing the UMA protocol are priceless contracts and the Optimistic Oracle. A priceless contract is a type of smart contract drawn up on the Ethereum blockchain. Unlike traditional smart contracts, priceless contracts don’t need a constantly updated price feed because any contract that’s undercollateralized is liquidated. Disputers who find invalid liquidations are rewarded with tokens, so network participants police themselves.
The Optimistic Oracle is a verification system used to track the underlying prices of the assets used in priceless contracts. Verification occurs only when disputes arise and UMA token holders vote on the proper price; the verification system then determines the true price. This system enhances security and scalability since less on-chain data is required.
Brief History of UMA
UMA was created in 2018 by two former Goldman Sachs floor traders who envisioned a more inclusive derivatives market. Because traditional brokers often charge high fees to buy and write futures and options contracts, these markets can be tough to crack for those outside the inner circle. But with UMA, the derivatives market is opened to individuals because anyone can create a contract on the Ethereum blockchain.
To keep contracts valid, assets must be overcollateralized. If you want to create a new token, you’ll need to provide the collateral in the form of Ethereum, DAI or other acceptable digital asset. When the collateral is deposited, an expiration date can be chosen, and the synthetic token can be minted and bought or sold on an automated market maker. Sounds like writing an options contract, doesn’t it?
UMA is a fairly ubiquitous crypto available at numerous different exchanges. As the price chart shows, two sizable jumps have occurred, and volatility has increased following February’s parabolic move. UMA currently has a market cap of around $1.5 billion and max supply of 100 million coins.
How to Buy UMA
- Open an online account.
Looking to add UMA to your cryptocurrency portfolio? Thankfully, you won’t have a shortage of choices. UMA coins can be bought or sold on popular exchanges like Pionex and Crypto.com. You’ll need to sign up for an account at one of these exchanges and fund it with U.S. currency to purchase UMA. Here’s a comparison of our favorite crypto brokers:
- Buy a wallet (optional but recommended)
If you want true crypto security for your UMA or other cryptocurrency purchases, you can download or acquire a wallet. Two types of wallets exist: hardware and software wallets. A hardware wallet is a disconnected hard drive where crypto tokens can be stored away from internet access. A software wallet is an app that can be downloaded for a smartphone, tablet or computer.
- Make your purchase.
Once you’ve chosen a broker and decided on a wallet, you can fund your account and make your UMA purchase. Much like a volatile stock, you’ll need to find a good entry point and execute your trade when your ideal price is reached. Cryptocurrencies are much more volatile than equities so use caution when submitting your buy order. Additionally, be mindful of both transaction and exchange fees -- you’ll likely be paying both a commission and spread.
Best Crypto Exchanges
Best Crypto Wallet
Best Hardware Wallet: Ledger
Ledger is one of the biggest names in cryptocurrency hard wallets. Thanks to the variety of supported coins and huge community network, Ledger is Benzinga’s top choice among cold-storage options for digital assets. The newest model is the Ledger Nano X, a sleek piece of hardware with unparalleled support and security.
Best Software Wallet: Coinbase Wallet
Coinbase is the top U.S.-based crypto exchange and Coinbase Wallet is the company’s hot storage wallet available for smartphones (iOS and Android) and other operating systems. Coinbase Wallet integrates with the main broker with ease and gives clients an easy way to securely send and receive crypto.
Trade, Sell or Convert your UMA
After purchasing your first stake of UMA, you’ll have a couple of choices with your investment. You can continue to add to your UMA with a recurring buy (Coinbase and Gemini make these easy to set up). You can also sell your UMA for U.S. currency or convert it into another cryptocurrency like Ethereum. Be sure you know what additional cryptocurrencies can be converted from UMA because not all protocols are compatible.
Current Crypto Prices
The cryptocurrency market has been rather stagnant since the crash earlier this year. Bitcoin and Ethereum have stabilized more as they’ve grown in size, but altcoins like UMA and others remain highly susceptible to bouts of volatility. Here are the current prices in the crypto market:
Is UMA a Good Investment?
UMA has both a noble goal and potential for success. Universal market access is a concept that DeFi advocates can get behind, and the protocol provides new ways to trade crypto through derivatives. One of the things separating the traditional financial market from decentralized finance is the existence of these derivatives markets. Derivatives provide investors methods to hedge bets, add leverage and use capital in ways beyond simply buying and holding.
With UMA, crypto investors can access these derivatives markets, and they don’t need to jump through hoops like futures and options traders on traditional markets. Imagine hedging your Ethereum holdings with an ETH put option or buying oil futures contracts on the blockchain without paying huge commissions or fees. Anything with an underlying index or asset price can be securitized on UMA — and yes, leverage and securitization can often lead to excessive speculation and financial risk taking.
When used properly, derivatives add liquidity and optionality to markets that enhance the experience for all participants. The protocol has promise, so UMA is an intriguing cryptocurrency investment.
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About Dan Schmidt
Dan has written about a wide range of topics including stocks and investing, cryptocurrencies, banking, student loans, and credit cards.