Bankless - AMA with Hart Lambur, Co-Founder of UMA Protocol

Episode Date: February 25, 2021

UMA Protocol (https://umaproject.org/​) provides open-source infrastructure for developers to efficiently create secure synthetic assets. Hart Lambur is Co-Founder. ----- 🚀 SUBSCRIBE TO NEWSLETTER: http://bankless.substack.com/​​  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/​​  ----- 💪BECOME A BANKLESS PREMIUM MEMBER: Lock in $12/month for life before March 1! http://bankless.cc/membership​​  ----- GO BANKLESS WITH THESE SPONSOR TOOLS: ⭐️ AAVE - BORROW OR LEND YOUR ASSETS https://bankless.cc/aave​​  🚀 GEMINI - MOST TRUSTED EXCHANGE AND ONRAMP https://bankless.cc/go-gemini​​  💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith​​  📱 DHARMA - MOBILE ONRAMP DIRECTLY INTO DEFI https://bankless.cc/dharma​  ------ 📣LATTICE | NEXT GENERATION OF HARDWARE WALLETS https://bankless.cc/gridplus​  ------ Relevant Links: UMA Protocol https://umaproject.org/  Hart on Twitter https://twitter.com/hal2001?s=20  ------ Don't stop at the video! Visit the official Bankless website http://banklesshq.com/​​  Follow Bankless on Twitter https://twitter.com/BanklessHQ​​  Follow Ryan on Twitter https://twitter.com/ryansadams​​  Follow David on Twitter https://twitter.com/TrustlessState​​  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this channel to products we use. We may receive commission if you make a purchase through one of these links. We'll always disclose when this is the case.

Bankless Nation. Welcome to this community. Ask Me Anything. We've got Heart Lamber here from the UMA protocol. This is a synthetics protocol. We're super excited to bring him here today. Some quick logistics. Of course, this is a community Ask Me Anything. So you guys feel free to ask questions. We will try to bring those questions into the conversation. You can ask them on YouTube. You can ask them in the bankless members only Discord. We're making a change. We usually do these on Thursdays around 12 p.m. Eastern, we are now doing them on Wednesdays at 12 p.m. Eastern. So quick change. I think we're doing it the second and fourth Wednesday of every month. So this is the fourth Wednesday of the month of February. We're bringing this to you here. David, how you doing,

man? Super awesome. You know, I've always been curious as to what the spiel behind UMA is, right? It's one of the few protocols that I haven't really done a deep dive into myself. So I'm really excited to get Hart on here to answer some of my questions. And then, of course, also the community questions as well. I know that a lot of these viewers for these AMAs are on Periscope, right? Because it's just easy to see it on Twitter. But if you want to get your questions asked, go to the YouTube chat box. I'm monitoring the YouTube chat box.

You've ever seen me doing this, like, looking off to the left. It's because I'm trying to get your guys' questions and relay them to heart. So that's what's going on. Always the YouTube chat box is a really fun place to be when we do these live streams. And so get your questions in there as well. And of course, if you are a bankless premium subscriber, you can also put your questions into the bankless Discord where we will prioritize those. Absolutely. All right.

Well, before we get to Hart, we're going to introduce him in a moment. But first, we want to tell you about the fantastic sponsors who made this Ask Me Anything possible. Guys, we've entered a bull market. Now is the time to start building your crypto and. Empire and you should do it on Gemini. You already know Gemini is the world's most trusted crypto exchange, but now you can do even more than trade. You can earn. You can take one of your crypto assets and park it in an interest earning Gemini account where you can get up to 7.4% annualized. There's nothing more satisfying than earning passive income on an asset that you're

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AVE is a borrowing and lending protocol on Ethereum and just recently released AVE version 2, which has a ton of cool new features that makes using AVE even more powerful. With AVE, you can leverage the full power of defy money Legos, yield, and composability all in one application. On AVE, there are a ton of assets that you can deposit in order to gain yield, and all of those same assets can also be borrowed from the protocol if you have deposited collateral. Here you can see me getting a 200 USDC loan against my portfolio of a number of different defy tokens and eth. I'll choose a variable interest rate because it's a lower rate than the

stable interest rate option, but I could choose the stable interest rate option if I wanted to lock that interest rate in permanently. One of Aves' V2 features is the ability to swap collateral without having to withdraw your assets, trade them on uniswap and then deposit them back into AVE. AVE does all of this for you all in one seamless transaction. So you don't have to repay loans in order to change the collateral you have backing them. Check out the power of AVE at AVE.com. That's AAVE.com. All right, guys, we are back with Hart Lamber, who's the co-founder of the UMA protocol. This is a synthetic asset protocol on Ethereum. We've talked about synthetic assets in the past, on the newsletter, various other places. We think it is an absolutely massive

It has absolutely massive potential within Defi. Hart, how you doing? It's great to have you on Bankless. Are you ready for the questions today? It's great to be here. And yeah, Ryan, David, I am ready for the question. I'm looking forward to chatting with you guys. That is awesome.

All right. So we got to clear this up because you are a former Goldman Sachs person. So you spent some time in the belly of the bees. David didn't know. I was not informed. So what is it like being in the belly of the beast in Goldman Sachs for the time you spent there and then coming to Defi? What's that transition been like? Well, I learned a lot.

So, okay, Ryan, I'm old for Defi, as we previously discussed. But I studied computer science and university like the true nerd that I am. And honestly, when I graduated, I was in New York at the time, I'm Canadian and there was no jobs. There's no startup jobs. There's no computer science jobs when I graduated. New York startup scene has changed dramatically. The only place I could get a job was at a big bank. That's actually how I ended up there.

And I ended up as a bond trader through the financial crisis. So I was actually the guy trading government bonds. When the Fed was doing all their buybacks, I was the guy. Goldman Sachs. I was actually selling the Fed all the bonds from Goldman Sachs. It's like absolutely hilarious. And so I learned a lot around how markets work, how market structure works, and how people respond to incentives. That's just been really fascinating. Did you learn how bailouts work during that time as well? I did learn how bailouts work. I did learn a lot about monetary policy. I'm not actually sure you and I agree on all the macroeconomics here, but doesn't matter.

I really learned a lot about how markets work, learned a lot about economics, learned a lot about incentive structures. And that set me up to play in defy really nicely. So what has, like, what's different about defy versus kind of traditional finance? So a lot of people, I think, in defy, it's honestly, they're learning finance through defy, which is, which is someone incredible. I think that the best way to learn finance these days is to actually get into defy, start using these tools because that's a crash course in financial history. But anyway, a lot of people entered finance listening to this through defy and don't know much about kind of the traditional financial world. What should they know

about it? What are kind of the differences that you see? Well, there's a lot of, a lot of work, a lot of stuff has been invented in traditional finance. It's just completely unapproachable. and completely unavailable to the average person. So like the thing that I think is wild about Defi is it like makes it possible for some 15 year old kid in his parents' basement to like create a financial product. Like that's a wild idea. It might be dangerous by the way. There might be like, you know, some rug poles or some bad ideas that get created in those

basements. But that approachability and accessibility is pretty fascinating. And if you think about it, like when I first started at Goldman, I would, I started right when structured products and CDOs and all this stuff was kind of getting created or was booming, I should say. And these were effectively financial products being engineered within these Wall Street banks and being engineered actually pretty badly within these Wall Street banks. And Defi now is like letting a whole other category of people tinker and build things.

And I hope they're being built and engineered a lot better than that's. stuff was. But the approachability and the ability to actually write a financial contract in your parent's basement, that is wild. And that just does open up finance to a whole different market for people to better understand it. All right. So let's go into that a little bit more. I love that juxtaposition between financial products from the legacy world versus financial products in the defy world. But let's talk about financial products and synthetic assets in the legacy world. Like, What is this world world like? And what are synthetic assets specifically in like the legacy world legacy financial system?

How do these things, how are these things built? How do they operate? Who uses them? Why are they useful? Yeah. Well, let's talk about like maybe the concept of just a derivative. David. So what is the derivative?

What's the point? Why does it matter? A derivative is a financial contract. And in traditional finance, it's really a legal contract. I'll actually come back to this, this analogy here too, but it's a legal contract. So Ryan and I can make a legal contract where we're betting on something. And it could be the value of Brazilian equities, the Brazilian stock market. And I'm picking the Brazilian stock market right now because it's actually like Ryan's in the U.S.

It's actually really difficult for him to buy the Brazilian stock market because of regulations and rules or whatever else. But Ryan doesn't really care about actually owning the Brazilian stocks. He just cares about betting on whether they go up or down. He just wants the exposure. So if you are a hedge fund or whatever, what you do is you go and you write a legal contract called a derivative with an investment bank that gives you access to this type of risk. And you can now sidestep the fact that this hedge fund can't actually buy Brazilian. equity because it's difficult to do so. Instead, they can buy the price exposure of Brazilian equities through this derivative contract. And so call that a synthetic kind of exposure where they

don't actually own Brazilian equities directly. They own a legal contract that gives them exposure to Brazilian equities. And so what has happened here is that hedge fund rather than like not being able to buy something is able to use a synthetic asset to kind of bet on any and to get price exposure on anything. And it makes finance for them global. The problem is that Ryan's not a hedge fund and he can't get access to that as an individual, right? He just, he just doesn't have the, there's not a resources. A Wall Street Bank won't write a derivative contract for him.

Hence, because it's a permission system, right? Like Ryan doesn't have like billions and billions of dollars on his bank roll. Like what are the other restrictions? that prevent, because I got my roommate downstairs, we like to talk about the future of finance. Why can't we just go create a contract between each other? And how is that different than like perhaps a bigger, well-capitalized institution making a contract? Well, you and your buddy probably could create a contract for each other. Like, David, let's say you're in the state of California.

The two of you guys could write down on a piece of paper, a legal agreement, what that thing is and say, hey, we want to do this. And you could probably, like, what's your enforcement, like, you could do that. But what's your enforcement mechanism there? I guess you could go and sue your buddy in the state of California if he doesn't, like, pay up on your derivative contract, which would be hilarious. But it's, there's sort of a barrier to end. It's better write like a multi-million dollar contract in order for it to be worth it to sue the guy, you know. So it's the same reason why, Ryan, like, won't have access to the derivative markets that a hedge fund does because he's just not a big enough fish to, like, go after a suit. The enforcement mechanism, this legal enforcement mechanism only works at, like, big scale for huge entities writing these contracts.

Defi, and frankly, what we're doing is designed to change that, to make that be accessible at a much more approach, like a much lower entry point, lower the barrier of entry. David, just, I think it's bad news for roommate relations to write derivatives with your roommate. So do you know, maybe no to that. But I've got a question, and this is like a big picture question, because when you talk about terms like derivatives, I want to make sure people understand this. I think a lot of people have seen this graphic. Have you seen this heart? It's like money around the world, right?

And like this is comparing the world's money in markets 2020 and it's very visual, right? So you've got each size square is worth a billion dollars. So we've got silver here, $100 billion with one square. And then you've got the size of cryptocurrency. And then you've got like military spending and it size that size is up. That cryptocurrency metric needs to get significantly updated. And it says it's $244 billion. This was made a while ago.

Yeah. So I guess like add like eight blocks or so, whatever, right? But it's like it's like close. All right. So then you've got US budget deficit on you go. And you got billionaires. they own. Then you've got the, you know, how much for gold? $8 trillion, $10 trillion in this calculation, $11 trillion.

Fortune 500s. Anyway, you get all the way down. You pass global debt. You pass real estate. Global wealth. Real estate, holy shit. Going past real estate, which is huge. Okay, real estate is, how big is real estate? God, that's before global debt. I don't know. I missed real estate. It's somewhere in here. Then you've got global wealth. But then you've got this big thing at the end, which I think is the stunner, which is derivatives. Okay. If all that other stuff, real estate, stocks, global debt, you thought that was big, you get to the end of this infographic and you see derivatives and it's like $560 trillion worth of global money is in derivatives. And you keep scrolling down and it takes a whole bunch of scrolls to see all of the value in derivatives. Can you explain that?

Like, is this good? Is this healthy? Is this how markets work? Or is this just, is there a real problem here? this sort of stuff is a bit of a misnomer because you have a lot of offsetting risk so Ryan you and I make a billion dollar derivative where you're going long Bitcoin and then you unwind it later but you don't actually unwind that trade you just do a derivative in the opposite direction for a billion dollars so now we've got a two billion dollar

derivative derivative's outstanding and the way the derivatives market has has evolved, there's just all of this offsetting risk, which, by the way, part of the problem here, part of the problem in the financial crisis is that nobody actually really had a good picture of that offsetting risk because it wasn't written down any, like, in one place. And was the issue was that it wasn't actually offsetting correctly? Was that the issue? Or people going to know what was offsetting, right? People like, there was like sort of just like, oh, I think, like I was actually on the Goldman

Goldman Sachs derivative trading desk. unlike when Lehman's blowing up and Goldman doesn't really know what risk they have to Lehman Brothers. They kind of think they know, but it's like if you're, when you've got numbers like that, if you're off by a little bit, it could be like billions and billions of dollars, right? And so, you know, frankly, there's a whole other thing where if you had a blockchain and you had all those derivatives written on a blockchain where somebody could actually go and look at really articulate precisely what the risk was, that to me, reduces systemic risk a lot. This is a whole other conversation, right, of just, but this is where I think

DFI is going and why I think, going back to what I was saying earlier, in 2006, when people were inventing CDO cubes or whatever, there was not a lot of transparency, you know, what the underlying risk of those products were. If you put them on a blockchain, it's a hell of a lot safer because people independently can see like, okay, here's what this thing is. And so to me, finance is meant for a blockchain. Like finance and what people's contracts are should be written on a blockchain because it provides a lot more transparency into where things are going. This is a big conversation that I've had with a number of Bitcoiners is that, you know,

Bitcoiners will point at defy and be like, look at all that risk. Look at that composability risk. Like if Maker-Dow goes down, the whole thing goes down. We're just going to recreate the financial crisis. And that's never made sense to me because I would say that financialization and financial tools can be dangerous. I think Warren Buffett has this quote that like finance could be like create weapons of mass destruction. But it's I totally see that like there's a fundamental difference that when everything is done in an inside out fashion and everyone has equal access to information and that information is actually consumable, that is what prevents something like an 08 crisis, right?

It's like we just didn't have the information because people only had a very narrow view of what they were able to see and no one could have the big picture. and now we have things like Dune Analytics and like the graph which lets us help us consume data. And that I think is really the fundamental difference that, you know, if we had Ethereum as the financial platform, the 08 crisis wouldn't have happened. Does that, how does that land with you, Hart? I agree, man. Like, listen, this is a controversial statement and some people will push back on it. But like, at a minimum, you take these mortgage back securities that blew up in 2008. and the reason why they blew up is nobody knew what was behind them.

Nobody knew what was in these mortgage-backed securities, right? They had to basically trust some bank or then some credit agency. And those guys didn't know either. It was bad. Think of trust, actually, here. There was too much trust baked into the creator of these products that couldn't be verified as to what it was. And so if instead that structure, if you were to make, imagine a sort of Ethereum-based version of it,

there's some wrapper that includes a bunch of like loans, but you can actually go and look at those individual loans on the blockchain, and you can verify with yourself trustlessly what's happening there. That is so much safer. And so I agree, David. You have the ability to view source on like financial tools and financial products, which is super powerful. You know, before I get off the infographic,

one other question I have heart is this. So if you scan the information, infographic, you look at traditional finance, the other thing that kind of jumps out at me is like the base money, the reserve assets are relatively small. And then like the derivative assets are absolutely massive. So like multiples of the reserve base money assets, right? So you've got kind of your layer one, M1 money that's tiny and then everything built on top gets bigger and bigger and bigger until you get derivatives. And they're the biggest of all, over 500 trillion. Do you expect the same thing to play out in this new financial system that we're building in DFI, where you have a relatively

small kind of base money reserve asset and then you've got like things built on top. But derivatives are the biggest from a notional value perspective of all. Does that play out here too? Yeah, I just don't know if you call them derivatives. Like there may just be something different. There's room for like new, new shit to get invented here. But like Ryan, I do agree. that what you will see at some level is like a base asset, a reserve asset, which, you know,

ETH is money, right? So we'll make an ETH. But you have a base asset and it gets used in all these ways that then the notional value builds up. And you're already seeing that happening in DFI, where like your base asset is ETH, which is used to create dye, and then you take the ETH-DI pair. and that can be used as collateral to take something else, you're already beginning to see this happening. And I think that is the nature of finance with leverage and debt happening. That's just the way it works. All right.

Let's get into some of the more specific details about UMA. And I think a lot of listeners, there are mental models around synthetic assets will probably begin with synthetics, which uses chain link oracles to come to a consensus about what the price of an asset is. What is the UMA model for producing a synthetic? Yeah. I think the mental model to think about here, I actually want to think of it as almost a primitive that we're putting forward. And if you go back to the early days of Maker where Maker was single collateral dye,

where it only had ETH in it. What happened there? You took ETH and let's call, let's make it wrapped East. Let's call it an ERC20 asset. You took ETH as a collateral and you created a derivative token, a synthetic token, die, that was deemed to be worth. There was a payout function. It was deemed to be worth a dollar of E.

That was what dies were supposed to be worth. It's supposed to be backed. What we've built is effectively a generalized version of that concept, where we call it a synthetic token that takes an ERC20 collateral and takes a payout function and creates a synthetic token, a derivative token that is some amount of that underlying collateral as defined by this payout function. And so this is actually a surprisingly powerful primitive because we can do all kinds of crazy things where we convert or transform one ERC 20 asset into another. The difference to point out, because you mentioned synthetics, synthetics has a different, just a very different model where they have a pool, a debt pool that's everybody staking their S&X to create this debt pool. and out of that debt pool, they allow users to buy synthetic assets. So all synthetic assets in the synthetics platform are collateralized or backed by this single debt pool. Whereas what we're doing, what we've proposed is it's actually much more of a component.

It's a single primitive that an ERC20 asset goes into this contract to mint a derivative token according to some payout function. So there's a big criticism of the synthetics model is this like, systemic risk conversation where like this one single pool of debt if that doesn't work out all synthetic assets crumble it seems and so the takeaway that i just got out from you and correct me if i'm wrong is that uma as a more as a primitive doesn't actually depend on one single pool of debt it uh is more modular between like the input asset and the output asset is that correct yeah that's that's that's that is correct i mean again i i think i actually have a lot of respect to the synthetic platform and all that just to be very clear. And I think they're doing

like really fascinating stuff. And the whole defy ecosystem should be thankful to a lot of their innovations and the way they push things forward. So see that clearly. But yeah, there is a pooled risk approach here that is true for other platforms. Like compound has the same issue. Compound any asset, it's got to, if any asset fails, the whole thing fails, there's similar arguments that can be made to some of these other pooled platforms. David, what we're kind of producing is more, we really think of it as a developer infrastructure. So developer can come to us and take our contract,

take our primitive, and say, I'm going to segregate this pool where I'm going to create a synthetic asset that's backed by just this one ERC20 in its own sort of segregated pool. And that has pros and cons. It's kind of got its own different use case. I think there's one kind of takeaway here is if you're listening and this is kind of your

first exposure to synthetics. Like the magic moment for me in understanding it was back to Hart's example of die. Like once I wrapped my head around die and understood that, then I started to understand what a synthetic is. And it's basically if you take an ERC 20 like a store of value, right, whether that store of value is wrapped Bitcoin or ether or whether that's USDC. So you take a store of value, and you combine that with an Oracle, like so with a price feed. Store of value plus price feed in a smart contract platform equals anything. You could create anything you want out of it. You could create S&P 500.

You could create like, you know, gold, silver, any commodity, any asset, anything that has value, you know, the art on David's wall, anything, basically. life. So that, that to me is, is why this synthetic primitive is so powerful, because we have a lot of store value ERC 20 assets, right? And we've made a lot of like strides forward to create great Oracle solutions. Now we have even arguably like more decentralized Oracle solutions like the Uniswap, TWAP. And now we can create anything. And by the way, this is the, the notion, if you've been following bankless for a while, the notion of why economic bandwidth is so important. What we mean when we say economic bandwidth is just the market cap and the liquidity of that

store of value asset. And it can be either centralized like a USC or it can be more trustless like ETH. But anyway, that's the combination. Store of value plus Oracle equals any kind of asset that you want. Is that a good way to think about it? I love that. I'm going to steal it and use it, Ryan, but it's alchemy, right? It is alchemy where you're taking store value, your C20 asset plus price feed, right, to any other thing. And it actually probably segues nicely into what our Oracle solution is, which I'm not even sure you guys have, like, we're pretty quiet about the,

or it's a bit under the radar, a bit more nerdy. But we have this whole philosophy on how to, we're written something, we're gonna label this the optimistic Oracle. Our whole solution to this is to not rely on a price feed, but to actually try to create these things where we only need a price if there's a dispute. And I can go in a bit more detail, but this priceless methodology that we've adopted,

this optimistic Oracle allows us to essentially create a price feed for anything, which if you take it back to your model of what you just described, if we have store of value, So ERC 20 asset plus price feed for anything, it literally lets us create a derivative or a synthetic asset for anything. And this is where I think our, I think the ability to create new shit to actually dream up assets that didn't otherwise exist suddenly becomes possible. So we could, if we wanted to make a price feed, if the price feed for anything could be the number of subscribers to your guys' YouTube channel, right? All of a sudden we can make a synthetic asset that actually tracks the value of like the number of subscribers to your guys' YouTube channel.

And I think this becomes super interesting and kind of fun. Yeah, it's basically back to that kid in the basement. That kid in the basement can go create a synthetic of anything. a value and then go trade it in this platform. That's the magic of it. The other magic of it, I think, is when we're talking about defy, permissionless open decentralized finance, this is what solves the GameStop problem, right? Like we could, like, rather than Robin Hood stopping trading on GameStop, we can create these synthetic assets in ways that they really can't be stopped by a centralized intermediary. So that's powerful too. Okay, so I got to confess,

though hard. I don't fully understand the priceless oracle thing. And I'm not sure we have the time to get into the technical detail. Like, I have my head wrapped around what chain link does. Like, I understand that. All of these various Oracle, like, I understand that. Uniswops Oracle at like a, you know, a decent level. But how is your priceless Oracle different? Is there like an explain it like I'm five just for that? Yeah. The way to think about this is we're, we're, enforcing our contract optimistically. And you can actually think, like, frankly, a lot of the thought process came from conversations we had with the Plasma Group, which is now the optimistic team and the optimistic roll-ups, like, same concepts here. The goal here is let's minimize Oracle

usage. Let's only use the Oracle if there's, like, a genuine dispute effectively in, like, player to like an exit game. And the way to think about this in a traditional, it's actually more like a traditional legal contract. Back to David's derivative agreement that he wrote with his roommate, right? In that derivative agreement, David wrote with his roommate this legal contract, you hope you don't have to sue the other person to enforce it. Your goal is to not go to court and litigate this thing. Your goal is just that you only use court as a, and you know, enforcement mechanism so that like, wait, if you don't follow the terms of the contract, I will sue you.

The very high level understanding for our optimistic Oracle is the same concept where we don't use the Oracle in 99% of the cases, and actually it's more than that, we only use the Oracle to get a price if there is a dispute in whether, in what happened. Okay, so it seems like there could be some efficiencies here because you guys, have removed the oracles and and but the oracles are still there in the backstop right so it's the threat of the oracles in the background that makes the incentives for people to follow the rules in the first place and i would imagine like i make or dow i heard this crazy stat from somebody who works at the maker dow team where they're they are spending 20 to 30 000 a day in gas fees to constantly

update the oracles on the ethereum l1 that's that's inefficient that's a crucial crazy number, right? Like, we could be doing other things with that capital. And so I think what you are doing is, what you are saying is like, well, we'll have the oracles, but we won't use them because we are going to give the option for participants to settle between themselves as they agreed. And if somebody defects from that agreement, then we will do the more expensive stuff, which is bring in the oracles. And that's like kind of, quote unquote, bring in the courts, right? Bring in the judges, bring in the lawyers. That's exactly right, David. And I think the Maker example, this is part of our path to thinking here, was exactly that. So Maker is pushing all these prices to the blockchain every five, 10 minutes or whatever. They're doing all this. And most of those prices aren't being used for any liquidation. They aren't being used for anything.

They just have to be there. And then you have liquidations that happen, right? That happened pretty rarely. So our design or like kind of simplifying it is like, okay. okay, when a liquidation happens, you have a keeper in the same in the maker system. You have a keeper say, hey, I'm going to liquidate this position. But there's no on-chain price feed. They just say, I'm going to liquidate this position now.

And the only difference we do here is we let that liquidation go through, but we don't pay the keeper their reward for a two-hour period. It's a parameter or our system. We don't pay them their reward for that period. And if anyone during that period disputes that liquidation, then it goes to the Oracle that's basically for dispute resolution. And because of the economic design here, because a liquidator, if they do a bad liquidation,

loses a lot of money, we've actually designed this where, you know, to date in the sort of six months, less than that, but five months that this design has been live, we've only had one dispute, one genuine dispute. We've tested it. And basically this optimist, enforcement has actually worked really effectively. And so it's very efficient in terms of a gas cost

thing. But the other thing that makes it really cool is we can be an Oracle for a lot more things, for pretty much anything. We don't need to, going back to the example of if we wanted to make a token with the number of subscribers to your YouTube channel, you guys couldn't do that right now in this current gas environment if you had to push an Oracle update for the number of subscribers to your YouTube channel on chain, that would just be too costly for you to do. The other advantage of this approach is that it lets us do things like that because disputes are so rare. One thing I want to ask is, so the threat of the oracles in the background is what keeps people aligned. And this makes sense to me when I, I'm reminded of our episode with Justin Drake not too long ago where he, he,

he didn't coin anything, but I would like to say he coined this rule, this law that I call Drake's Razor where if you can use cryptography or cryptography, use cryptography and if cryptography fails, use crypto-economics. And this seems to be saying like, okay, we'll just use the protocol and if there's a dispute, then we'll turn to crypto-economics, right? My question is like that two-hour window of that dispute window, that is nice, that makes sense, but like what if, and maybe this is kind of missing some of the design here, but like two hours is a long time for liquidations, but kind of a short time for humans, right?

Like I sleep eight hours a night, or I at least try to get my eight hours night's sleep. What if somebody tries to liquidate me in those two hours while I'm asleep? Like, what's up with that? How do we get the assurances there? Where do the crypto economics come in? Yeah, that's where this like crypto network is so awesome, right?

Because, David, we can design this. So if you have a position, you get badly liquidated. you get liquidated when you shouldn't have been. We don't need you to dispute that. We need just somebody that's watching the network to dispute it. And as long as we can pay that dispute or a legitimate, like appropriate reward, they show up. People respond to economic incentives.

So while you're asleep, if you get unparally liquidated, some guy in Hong Kong should be the guy being like, okay, I'm going to dispute David's liquidation here, the guy that liquidated David here because he shouldn't have been liquidated. and I'm going to get a reward for doing so. And so the idea is that you just have this crypto, you have this network where all these eyes all over the globe are watching these transactions

to make sure they're appropriately followed. And they're responding purely to economic incentives. I'm going to slip a quick YouTuber question in here because I think it's relevant right now. Somebody watching on YouTube is asking, we recently wrote an article about Keeper Dow. Are you familiar with Keeper Dow? cart? I am familiar, not like super deep. I think it's really interesting. Are they an entity that can

provide some of the liquidations that you were just talking about, the kind of a keeper entity? Are they doing that or are they the type of entity that would do that? Yes, the type of entity. No, they're not doing it right now, but we've talked to them and I've like entities like that to do this. And again, it kind of goes right into this whole idea of like they'd be one of these, these network. It's like out there in the ether, pun intended, that's monitoring how monitoring these contracts to make sure they're appropriately followed. Okay. So you've got this synthetics protocol, this primitive that you've built out. Can we get into a few examples of this of how people are building it? So you've got 63 million total locked value in contracts on

on UMA, 21 million of synthetic tokens that have been melted using UMA and nine projects. Can you give us, highlight a few examples of how UMA is being created and what synthetics are coming out on the other side? Yeah, those numbers are actually all scale. We don't have that being updated live yet. That's something that's happening in the next week or two. You can pull that right from the blockchain. I know, I know.

It's embarrassing. So they're higher than that. But yeah, I can talk about like the types of things that have been created that I find like really interesting. And again, guys, the part that I push here, we are trying to position UMA, like our infrastructure as being this platform to create these synthetic assets. We're not creating them ourselves and we want to make it super easy for a developer to that comes up with an idea. And developer might even be a wrong word. It's like a financial product inventor, right, that comes up with an idea. We want to make it super easy for them to go and create that thing.

And so stuff that's been created, fixed term loans, we'll call these like yield dollars or zero coupon bonds where I take Ethereum or I take rap Bitcoin. That's my collateral. And I want to create a synthetic token that's worth a dollar at some future date. So, okay, I've just built a lending platform based on this. asset. What the Badger Dow community is doing is taking this concept in a wild direction where the Badger Dow guys have all of these vault tokens. So people that have my favorite example is like the Badger WBTCE sushi token. So you're providing liquidity on WBTCE and then you're staking it in Badger to earn Badger tokens and you've got this bulk token that is an

illiquid asset. Well, what if you use that as collateral in a synthetic asset to mint a yield dollar token, a token that's worth a dollar at XBree? Shit, I've just like used my illiquid asset and I've transformed it using this alchemy process into something usable that I can now get leverage or borrow against, which is kind of cool. So that's one thing. I'm going too deep here. Project teams are creating a Bitcoin dominance tracker. So I can buy a token that tracks Bitcoin dominance. As Bitcoin dominance goes up or down, I make money. Same with altcoin dominance. I think this is a super interesting financial product to bet in like the market, a market neutral way on whether the long tail of crypto assets is going to do

better or worse. Somebody created a Bitcoin cash synthetic on Ethereum. I don't want to go. I don't, not really, I shouldn't say anything too controversial to Bitcoin Cash. I don't know why people care about this, but someone wanted to say controversial things about Bitcoin Cash. Yeah, that's fine. So, okay, so hard, like, it's pretty amazing because it's a blank canvas.

as anyone can create anything they want. But where would someone get access to, like, let's say I wanted to bet against Bitcoin dominance. Not saying I do, but let's say I did. Where would I go do that? Because there's no, like, UMA protocol where it's all of, like, website or, you know, where it lists sort of all of the different assets from UMA. It's just, this is just available in the rest of kind of the defy infrastructure.

Like I'd go to uniswap and find that, or is there one central location where all of these synthetics are trading? Yeah, I mean, Ryan, that's kind of like a good, like we don't know, I don't know the answer to that. I don't know if we, like, should we have a centralized page that lists everything that's been created with a protocol? Maybe that seems like a good idea. That seems like something we should build. For if you wanted to bet against Bitcoin dominance, you can buy an altcoin dominance token right now on domination finance, which is using our infrastructure behind the scenes. There's sort of an open question here just for us as a project where how loud do we want to be versus behind the scenes?

Like, you know, Stripe doesn't list every merchant using the Stripe platform to like process credit card payments, right? But we might be different. Maybe we are supposed to list everybody that's building synthetic assets. It's kind of an open question that I don't know. and discoverability does matter. So you make a good point. Maybe we should have a page where here's everything you can buy. Hey guys, we're going to take a break in the action.

Don't go anywhere because there is so much left in this AMA. We bring up next the conversation of liquidity. All assets on Ethereum need liquidity. And each one gets its liquidity in its own particular way. And so we ask Hart how the synthetic assets out of the UMA protocol find liquidity. And we compare and contrast that to the. synthetics model as well, which was a pretty interesting conversation. There's some some nice nuances to pull out there. So don't go anywhere. There's so much left in this AMA. We're going to take

a quick break to talk about some of these fantastic sponsors that make this show possible. If you are looking for a product that connects your Fiat bank account with defy tokens and products, you need to download the Dharma mobile app. Dharma is a non-custodial smart contract wallet and comes with a bridge that connects you right into your bank account. Dharma is the fastest and most efficient wallet between your fiat and your bank account and any token on uniswap or even any vault in yearn. With Dharma, you can get over $25,000 per week into the defy universe and you can do it non-custodially. If you or anyone you know is hot on defy and you're trying to get your money into a defy investment, Dharma is the place to go. Signing up and going through KYC is an absolute breeze. It took me just under

three minutes and after signing into my bank account via Plaid, I am now just one transaction away from any token that Uniswap has to offer. Go to www.dharma.io, that's dh-r-r-m-a-d-o. Download the Darba app and get yourself unbanked today. If you want to live a bankless life, you need to get a monolith defy visa card. Monolith is both a one-two punch of an Ethereum smart contract wallet, as well as an accompanying Visa card that lets you spend the money that you have in your Ethereum wallet wherever Visa is accepted. It's really a fantastic tool that lets you use Ethereum for what it does best, which is holding and managing your financial assets, but also keeps you connected to the rest of the world's payment rails. Monolith also offers on-ramp services for getting

your Fiat money into the world of defy. So it's trivial to top up your monolith card if ever you need to and your deposited money goes straight into your non-custodial. wallet. So your money is never held by a centralized intermediary because your monolith wallet is native to Ethereum. Monolith helps you transcend both the legacy and the crypto worlds because the money that you hold in your monolith wallet has the power of defy behind it. Swapping assets on uniswap or earning yield in defy is at your fingertips. But with monolith, so are the groceries at your grocery store or the coffee at your coffee shop. Go to monolith.xy Z to sign up and get your monolith visa card to day. Hart, I want to know where liquidity comes from in the system, right? We earlier talked about

a potential synthetic asset that tracks the bankless subscribers, right? And I'm, I would be bullish on such an asset, right? But doesn't that mean that's- I'm glad to hear you say that, David? No, super bearish, not going anywhere. But like, if I want, if I buy it into an asset that tracks bankless subscribers on the YouTube, does that mean that somebody needs to take the opposite side of that trade? Like, where does the liquidity come from? How does this work? Yeah. So, David, this is where AMMs are mind blowing and are the future. And guys, like, this is again, coming from a guy that was a market maker at Goldman Sachs for like a decade. Like, screw that. AIMS are the future. It's because of this long tail, right? It's long tail stuff. Yeah. And me, like,

Listen, so right now, the answer is that to get, to make these synthetic assets usable, they need to be put in a uniswap pool or AMM pool that has reasonable liquidity. Right now, that's actually pretty capital intensive. It takes a lot of capital to create a uniswap pool that has decent liquidity around this stuff. But I have a lot of faith that that's going to change, be it in future versions of what balanced our new swap are doing, or we've got some other half-baked ideas, too, on how to make this stuff be a lot more capital efficient.

But really, the AMM idea and the fact that there's people out there that now get it, they're like, oh, look, I can be a liquidity provider and earn fees by being this market maker. And I might get short. I might sort of sell an asset that I otherwise like, but I'm getting paid to do so. This is like a core concept that is frankly making, I think, these long-tailed synthetic assets usable. So your core question, David, you're right. Like right now, your YouTube channel subscriber, it's a bit costly. Like, you'd have to actually put a lot of capital in to make this

subscriber token liquid. But I think that's going to get better, easier and easier and easier, and less capital intensive in the near future. Okay, so I would just like to summarize. And again, I want to compare and contrast the UMA model with the synthetics model. The synthetics model, people really appreciate because they have infinite liquidity on any asset because all they have they have this massive debt pool which means liquidity can come from anything but there's also that conversation of like well this this is also this the commitment to infinite liquidity is also a commitment to systemic risk right so like bullish and bearish right at the same time UMA strips out that mass like that unified liquidity debt pool and so it doesn't have infinite liquidity for everything but also

doesn't have any systemic risk, right? So that means that it's not just enough to make a synthetic asset. You need to also create liquidity, right? So just because you can create an asset doesn't mean that it's liquid, right? So it's a two-part process. Is that correct? That's spot on. And I think that's exactly right. So right now, in order to make, you can make a synthetic asset right now on pretty much anything, but then you've got to make it usable, right? And making it usable requires making it liquid, right? So I agree with your two-step process. And I'd also agree that the second part of this process right now,

that's where I think making it less capital intensive to make it liquid, makes that two-step process easier and easier and easier. It's the other difference between synthetics that UMA is a bit more like blank canvas, in that it's permissionless. Like I could create whatever synthetic I want, whereas with synthetics, you know, they kind of add, you know, different synthetic listings over time onto their platform. But synthetics, you could just build anything.

It's kind of permissionless. That reasoning goes back to the Oracle, like goes back, Ryan, to your bit of, like, store of value, ERC20 plus price feed, you know? So synthetics is limited. Synthetics is limited by price feeds. They need a chain link price feed for something. So that has to exist. And also then, I guess, financial engineering concerns around, like, their debt pool

and the risk they're doing. Yeah. But chain link, like there aren't chain link price speeds for anything. And in the current Ethereum gas environment, they couldn't be. It would be too costly. For sure. And even if you didn't have this gas environment, you still need, like, that's still different. And also, by the way, I'm fan of chain link and a lot of what they do.

And, you know, there's real use in having, call it like the fat, head assets being pushed on chain. Like the ETH dollar price should be on chain for people to use. That makes a lot of sense, you know. But the long tail stuff, this is where you get more constrained. So there's just pros and cons to all these different approaches. And I think, as you pointed out, this is a very, very big market, and it's all symbiotic. Right.

So different approaches for different use cases that I think all jive together quite nicely. So one thing we've noticed ever since DeFi Summer came around is that protocols are able to leverage their token to add liquidity, to help bootstrap liquidity into their system. Is that something that the UMA, because UMA has a token, I believe it's called UMA, how does the UMA token integrate itself with the UMA protocol? And does that help bootstrap liquidity anywhere? So our token, our token holders are fundamentally the voters in the voters and, the Oracle. Our token holders are effectively the Oracle that we try to minimize usage of. And it will keep it at a high level for that. And then separately, David, to your point, we are using our token in liquidity mining campaigns. And we actually have a pretty interesting

problem we call developer mining. But we are using our token to help incentivize liquidity in these pools to help make them make the assets be more liquid or usable. And so, yeah, yeah. And we talk about developer mining for just one second because that's a theme we talk about a lot on bankless, which is, you know, Dave and I like to joke that we work for algorithms and protocols, which we basically do, right? And but there are more and more opportunities. We're talking to the graph, you know, not too long ago. Maybe it's our AMA before last. And they talked about how success, all of the earning potential possibilities that existed within the graph protocol. So tell us about your developer mining.

If I'm a developer, I want to do something for UMA protocol. Is there an opportunity for me? Yeah. So first of all, high level question or not question, statement, we are designing incentive structures. Like crypto is designing incentive structures. Ryan, to your point, we work for algorithms. We work for incentive structures here.

And liquidity mining, yield farming, is a fascinating incentive structure that has been proven super successful at getting liquidity into AMMs, call it. We wanted to take that concept and be like, okay, well, wait, we actually really want to incentivize developers with an idea for a product to come and build on our platform or build using, build on the, build using our infrastructure. And so we can actually do clever things like we can measure any new synthetic that gets created, how much value is minted in that synthetic. How popular, quote unquote,

popular popularity measured by dollar value locked. How popular is that synthetic? And then what we can do is every week, we can look at all the synthetics minted on our platform and be like, oh, this synthetic is, here's the popularity. Let's pay these guys rewards. Let's pay these developers rewards based on the popularity of their idea. This is cool. Okay. So, So when you say developers, what you mean is kind of this new class of financial engineers who's developing synthetics. And what's really cool about like this is when we started to get Web2.0, right, with like Facebook and Instagram and everything that came after, it created this whole new economy of people from their offices or from their homes who would just generate content for what? For attention, for likes. That was kind of the currency.

What you're talking about is essentially these kids. in their houses or wherever they live or anybody really being able to create synthetics. And the value of the synthetics that they create is based upon its usage. And you can actually earn an income that way. Right. So like, now you have YouTube influencers, basically. You could have like synthetics creators as a full-time hobby job. Like, or, you know, maybe a very lucrative job depending on the success of it.

This is what you're talking about. Yeah, I'll, Fred Erisim, I stole this idea from a while ago. But so long tail, long tail financial products, right? If you think of YouTube's like the unboxing video, something you could have never predicted, right? And like this whole like on, like all this shit that happened because of user generated content, I do have a belief. And I'm timing of this is hard, but I do have this belief that we will have like user generated financial. products of a sort that are like this long tail of things that you want to otherwise predict. And you're right, Ryan, I see there being a world where if people produce financial products

or produce ideas that other people want, they can earn an income off of that. I think that is a world we're going towards and I don't quite know what it looks like, but I completely agree. It's part of our vision, right? that like this it's easy to create financial products. It's easy to build in defy. We kind of like building this defy stuff simple. And this new class of kids in their basement create interesting things that other people want.

Okay, guys. And everyone in the YouTube, this is the last call for listener, YouTuber questions. So if you have a question for Hart, get it into the chat box. Also like and subscribe. Hart, my question for you is no one can really. predict the future of UMA better than you and the UMA team, right? And so when you guys are shooting the shit, eating lunch, like not really thinking about the future, what are some of like the crazier things that you guys think about that you

could do with UMA? Like if you guys really went like super deep and you're like, well, we could do this and then this and like give us an example of some really like sci-fi type stuff that could happen out of UMA? David, that's a good question. And I'm currently obsessed with thinking about this stuff. So we did our KPI options, right? We can create a synthetic token, like a project can create a synthetic token that pays out some amount of project tokens based on a project hitting their KPI.

We announced this. I think it's a better type of incentive structure than many yield farming things out there too. Because what you end up aligning the collect. You end up giving the community ownership in the success of protocol. I think that's wild. And I think the types of ways you can expand that are pretty wild. We can create all kinds of call options, a lot of different options markets and like structured notes, various sort of interesting payouts using the same primitives, the same synthetic. I've actually very recently realized we've only scratched the surface of like what Ryan's alchemist.

me is an example of store value, like ERC20 asset plus price feed equals like big, big space. One of the things that is really mind bending that I'm recently thinking about is what if we were to create a synthetic asset collateralized by its own A&M pool? This is recursive. It makes your head hurt a lot. But I think there's like wild things you could do there. There's lots of fun stuff. Basically, I think we've got a lot of potential innovation coming. I want to ask you, we're getting to kind of the close. Maybe there's some other questions we should ask. But this has been kind of burning in my mind.

So you started at Goldman. Now you're fully down the defy rabbit hole, right? You're all in here. So I guess my question is, why hasn't Wall Street? Why haven't other financial engineers in traditional finance discovered defy? Like they love building financial products, don't they? Of course they do. Like, do they think you're crazy when you talk to them about this or when you keep in touch?

Or like, why aren't we seeing Wall Street using UMA protocol to create all of these really cool derivatives? So, Ryan, they are jealous. They want to be doing this. This is all they want to be doing. And like, you know, my old boss at Goldman works with us now, works really closely and is doing this just having a lot of fun. He wrote a blog post on like creating structured notes using building all this stuff. He's having a lot of fun doing this. The difference here is the people want to play in Defi.

I actually talk to a lot of Wall Street people that are either looking for jobs in Defi or want to transition to it or whatever else. the institutions, like having worked at Goldman Sachs, the institutions aren't going to move, man. They're going to get like, and we don't want them to move. You want Goldman Sachs to have its lunch eaten by like Uniswap or something, right? And that will happen. That's just, I think that's just how technology evolves, where the people in the incumbent, in this case, Wall Street, will move to this new infrastructure and will build new entities, organizations or whatever else that will eat the incumbents.

And that's like, that's, that's great. So what's in the, what's in store for the future of UMA? Like, what's on your guys' roadmap that we have to look forward to? A lot. So we're doing this KPI option thing, and we're going to be doing our own version of it, where we are going to be air dropping tokens to people in our community and people that have been used governance in other communities, been active governors in other communities.

We're going to air drop them an option that will increase in value the more RTDL goes up, which I think is pretty cool. I'm pretty transparent. I think there's a cool idea for call options that we're going to put out in the near future. We're going to publish more loudly

about our optimistic Oracle, which can be generalized for other use cases outside of just synthetic tokens. and make that be kind of like a cool, primitive that can be used for applications where you need a price feed on something weird, on kind of a price feed on anything. And then we have a perpetual synthetic token, which is a pretty hard financial engineering problem that is audited and ready to go. We're going to put an experiment. We're going to test that out.

So there's a lot. It's like we're pretty busy right now. UMA as a platform, I'm reminded of that one, like, famous GIF of the Microsoft people on stage going developers, developers, developers. It sounds like you guys need a bunch of developers. So if we have any developers listening, I'm seeing some developers in the YouTube comments, how can they get started to go start playing around with UMA? Because interestingly, UMA seems to be not just a money Lego, but a money Lego factory. And it seems to really need money Lego developers to really build out money Lego structure. How can developers get started?

You guys are so good at like the taglines and the marketing, right? Like I'm gonna steal that David, the Money Lego factory. That's like good man. I think there's a job title in there too, like Money Lego designer. Money Lego factory worker. Like a very blue collar title here. I like that a lot. So David, you're entirely right.

We want, and I actually joke back to that Steve Balmer on stage being all sweaty, going developers, developers, developers, that is what we want to do. Best way is join our Discord to start with, Discord.UMAproject.org. And we need to do better documentation. We do all this other stuff, but join our Discord, read our docs, and, yeah, chat with us, basically. it. All right. I want to see you replicating the Steve Bomber gift someday, just getting up on a stage screaming it. Make sure you feel the passion that bomber felt at that time. Man, this has been a lot of fun. I think I didn't know a ton about UMA protocol going into this, but I feel like I know a ton coming out. Hart, thank you so much for spending time with us today. We appreciate it. Thank you guys. This was like really fun um do it again sometime awesome all right bankless nation we are going through all of

these interesting projects on the ask me anything to help level you up on what's going on in defy and it moves so fast that's why you have to keep tuned in so like subscribe the video check out the the podcast as well podcast version of this comes out on uh Thursday as always risks and disclaimers ETH is risky, defy is risky. So are synthetics that are based on the Ethereum platform. You could lose what you put in. But we're headed west. This is the frontier.

It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot.