UMA: Universal Market Access. Interview with Allison Lu
Allison Lu, shared her thoughts on an idea of a parallel financial system and what it’s takes to build decentralized financial contracts platform enabling Universal Market Access.
Hello! What’s your background, and what are you working on?
Hi! My name is Allison Lu, and I’m the co-founder of UMA.
I started my career at Goldman Sachs and traded interest rate products throughout the global financial crisis. Through this experience, I began to see how financial products could catalyze economic growth and wealth creation, and yet also serve as “weapons of mass destruction.” I decided in 2015 to join a social mission-oriented startup called Tala that extends smartphone-based loans to people in countries like Kenya and the Philippines.
Though the activities were completely different and served polar opposite types of users, I saw from both work experiences how deeply flawed and unfair our global financial system was. Information asymmetry, backdoor deals, and short-term thinking plague the financial system regardless of whether you’re a US-based institutional investor or a micro-business owner in Tanzania.
This was when I started to dive deeper into blockchain and the idea of a parallel financial system. Rather than trying to tack incremental improvements onto our existing system and promote financial inclusion, could the financially excluded just leapfrog the current paradigm? What if we could design a system that had a different set of initial conditions than where we are today? What if the financial system couldn’t be evil, and was built to serve the interests of all the people within it, rather than the powerful people at the top?
My co-founder and I started UMA in 2018 with a mission to enable Universal Market Access. Our technology consists of two sets of infrastructure. The first is financial contract design patterns that use economic incentives alone to ensure payout, creating a non-recourse system for financial risk transfer. The second is a decentralized data verification mechanism that adds economic guarantees to blockchain oracles.
The purpose of this infrastructure is to enable open financial innovation. Builders (meaning developers, entrepreneurs, and tinkerers) can use our technology to deploy decentralized financial contracts on anything with a price easily. The first mainnet product they launched was USStocks, an ERC20 token tracking the return of the top 500 US stocks that allows anyone with crypto to also invest in the US stock market.
Since then, our team has been working with a handful of other stealth projects to customize their financial products. Now, we’re making the interface to create financial products with UMA available to the general public on the Rinkeby testnet! We’d love to hear from and support you in your financial product ideas.
What’s UMA backstory?
Starting in late-2017, my co-founder Hart and I were exploring various ideas for blockchain-based solutions to problems within the financial services industry. Our method was to go through the history of financial innovations, and we very quickly came to financial derivatives. We realized that blockchain-based derivatives had the capacity to help people all over the world leapfrog the existing fiat financial infrastructure in their countries and attain Universal Market Access.
We both started our careers on the Goldman Sachs interest rate products trading desk, but being technologists at heart, we each left to pursue our passions in technology. Hart’s first business was a social finance tracking app called Openfolio, which was acquired in 2017. I was an early employee at a mobile lending app called Tala, which now provides its 2M+ users with micro-credit in developing countries and continues to operate with 550+ employees worldwide.
We realized that many financial services and innovation were only available to the super-wealthy and developed world, but were completely inaccessible to those in emerging markets. Hart and I wanted to work to change that. We used some of my contacts in emerging markets to validate the problem of market access and started building infrastructure to address it.
We always knew that in building infrastructure to create derivatives that our protocol would need an oracle. As we started to conduct R&D on oracles, we realized that if we wanted to build a protocol that could scale to support trillions of dollars of economic value, we needed an oracle with economic guarantees. We wanted to do better than replicate manipulatable systems like the LIBOR panel from our old institutional interest rates world. So, we also developed the Data Verification Mechanism, which is currently being tested on the Kovan testnet.
Though we started R&D by bootstrapping ourselves, we needed the resources to build a rockstar team. Placeholder VC led our $4M series seed financing in late 2018, alongside several other institutional investors. They’ve also been instrumental in connecting us to other builders in the #DeFi movement.
What went into building the UMA?
We launched our first financial contract template on the Ethereum mainnet in March 2019. Partners used this template to create the proof-of-concept USStocks, which grew to have over $1M of value. This first template referenced a centralized price feed. While we were learning from the POC on mainnet, the UMA team spent Q2 developing the Data Verification Mechanism, a decentralized oracle. We launched the DVM to testnet in July 2019 and plan to bring to mainnet in Q4 and merge with our existing contract template. We decided to launch in this way because we wanted to have the opportunity to learn from products in-market rather than committing to a full year of development time in the dark without any learnings.
Security is our top priority in all that we do. Trail of Bits conducted our mainnet contract security audit. HackerOne runs our public bug bounty program. We have internal PKM and operational risk handbooks as well as formal escalation processes.
During the first half of 2019, #DeFi lending protocols took center stage. Most of the usage was to facilitate margin trading. We came to realize that the current crypto community was here for the volatility and uninterested in “boring” assets like fiat stocks (though we continue to work with partners on designing other POCs for more mainstream adoption). We decided to meet users where they were today and spend our resources on promoting #DeFi composability and making financial innovation as easy as possible amongst builders.
As we’ve built out UMA, we’ve learned the meaning of the adage “it takes a village.” Crypto is a brand new industry, and there is simply too much for a single company to build alone. Everything from fiat onramps, education, UX design patterns, and liquidity are all sourced from the community. The enthusiasm, excitement, and ideas from this community is what motivates us to keep developing new technology.
What’s your business model?
UMA is a financial infrastructure business. We are successful to the extent that developers using our technology are successful in designing products that are useful to end-users. Our means of value accrual is via our oracle: it charges a dynamically adjusted fee to its users in return for providing a financial contract settlement price. Our goal for oracle governance is to charge the minimum fees required that still ensure the security of the system.
Oracles are an enabling primitive that power complex financial contracts. Like most things, it’s a question of which oracle is appropriate for the job, and which parts of your contract require decentralization. Prediction market systems like Truthcoin and Augur, which use Schelling Point voting schemes to incentivize truthful voting have heavily influenced our own design.
Though our means of value accrual is through our novel oracle design, our differentiating factor is in financial design/engineering. We initially started by targeting users who had both blockchain development and financial expertise (for example, crypto market-making funds and people who came from financial markets backgrounds but studied CS in school). While we knew how to communicate and sell our product to that group, they weren’t as aligned to our mission or interested in bootstrapping creative, new financial product ideas. We realized that we could both differentiate ourselves in the market and foster greater creativity by supporting developers who had novel ideas, but more limited access to capital or financial markets. So we’re now focused on building tools and offering resources that make it as easy as possible for developers to test their financial product ideas on mainnet without a lengthy smart contract development cycle.
What’s your position on the regulatory landscape today?
UMA builds blockchain-based protocol technology. This technology essentially allows for “end user to end user” financial contracts that are self-securing—they are margined and secured with digital assets (used as margin collateral) embedded inside a smart contract. The regulatory framework for these types of financial contracts differ country by country, and we expect our protocol’s users to be aware of and compliant with their local jurisdiction or the jurisdiction of their user base.
Many countries have started to take a proactive and positive approach towards blockchain technology. Some forward-thinking regulators looking to leapfrog existing financial infrastructure are even taking steps to promote development of financial services in their countries or set up regulatory sandboxes.
What are your goals for the future?
Our mission is to enable Universal Market Access. To that end, our top priority for the rest of 2019 is to launch our oracle (the DVM) on mainnet. Although the core contract technology has been implemented, there are still several steps to ensure its success. For example, we want to help our community to set up voting nodes and maintain high voter participation, as well as establish a pathway toward decentralized governance. We also want to continue launching POCs with our partners that use the core contract template and highlight the extensibility of our technology. Lastly, we have been researching a new framework for writing financial contracts that don’t require an on-chain price feed at all until settlement. We will build a reference implementation of this in Q4 as well.
None of this would be possible without the hard work of our team and the broader Ethereum/DeFi community. Building and growing a talented, multi-functional team is both the most challenging and rewarding thing that I feel I could ever do. One of the things I’m most excited about on our roadmap is to share our team’s financial expertise and market-making connections with the DeFi community.
What are your future thoughts for the DeFi market?
DeFi has mostly gotten traction in the area of decentralized lending, which in turn has mostly been used to facilitate speculation and margin trading. The people who have used DeFi services to date have mostly been crypto-native early adopters. In order for DeFi to really “matter” - not just for the tech-savvy elite, but for the other 99.9% - we need to see broader cryptocurrency adoption, accessible UX design patterns, and product go-to-market strategies that meet mass consumers where they are today and not where we want them to be.
We are still in the early infrastructure/capacity building stage - we’re creating the lego-block primitives that people will use to create these mass-market products. All the potential in the world is possible, especially as more and more people globally get internet-enabled smartphones. Future generations may never even know a world without blockchain-based services, and they’ll wonder how their forebears ever trusted fraudulent or spurious intermediaries.