For those unfamiliar with UMA, the protocol allows anyone to create a synthetic asset whose value is tied to an underlying reference index. In the case of this first token, ETHBTC’s value is tied to the relationship between the price of ETH relative to the price of BTC.
“This token tracks the ETHBTC price ratio. If ETH outperforms BTC the token value will go up; if ETH underperforms, the token value will decrease. The token expires on 1 August 2020.”
What’s special about this specific synthetic is that it is priceless, meaning that this relationship is entirely reliant on the underlying reference index, rather than onchain data being tracked by a price oracle. The thought is that by only using price oracles to settle disputes, there is less room for error in the event that an oracle is manipulated.
How Does it Work?
Just as with all synthetic assets on UMA, tokens must be sufficiently collateralized – in this case to the tune of 120% over-collateralization. ETHBTC uses DAI as its collateral source, although it’s been stated that other synthetics may use ETH, USDC or any supported ERC20 token in the future.
The key takeaway from this design is that there can only be as many tokens as there is collateral backing it. Seeing as there is a current supply of 2M ETHBTC tokens, we can assume that the market cap started at roughly ~$48,000 (2M x $0.02/token x 1.2% collateral).
Anyone can purchase ETHBTC synthetic tokens directly on Unsiwap V2 using DAI, meaning they are signaling that they believe the price of ETH will outperform the price of BTC between now and August 1st. What’s unique about UMA’s design is that anyone can short ETHBTC by becoming a “token sponsor” or someone who deposits collateral (in this case DAI) to mint new ETHBTC tokens.
While tokens are set to expire on August 1st – at which point they are redeemable for their value in DAI – it’s also possible for people to sell their existing token prior to maturity, likely at a discount or a premium (depending on demand) as we’ve seen with the sale of Opyn covers and oTokens.
UMA Building Blocks
The launch of the first priceless synthetic token comes at an exciting time for those eager to bet on the performance of ETH relative to BTC. As stated in the original post:
“Historically, people have traded ETHBTC by swapping ETH for BTC or vice versa. Never before have people been able to trade the value of the index itself. This token allows users to trade ETHBTC without needing to take on any underlying ETH or BTC exposure.”
For anyone who has been keeping up with UMA, there’s no denying that the potential for an endless suite of synthetic tokens is coming. As we shared in our last article on UMA, we can envision synthetic tokens that track DeFi TVL, DEX market shares, and endless other options.
While the road to get there will require some technical understanding of the protocol, we expect that tools to be built on top of UMA to make this process as accessible as possible.