ETHBTC Synthetic Token is LIVE on Mainnet‼️ This is the first "priceless" synthetic token created using UMA's infrastructure.
You can now bet on ETH outperforming BTC—tokens are on Uniswap v2🦄.
— UMA (@UMAprotocol) May 20, 2020
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.”
Why ETHBTC as the first synthetic? $UMA token holders voted to approve the components necessary to build this earlier this week. ETHBTC was selected as the first test b/c it's DeFi-centric but not too serious. Enjoy, #DeFi nerds.
— UMA (@UMAprotocol) May 20, 2020
The post also goes on to suggest that this first launch is specific-geared towards “DeFi-nerds” or those who are keen to explore the fringe of these exciting new financial primitives. While the contracts have been audited by OpenZeppelin, UMA has been very forward that this is still highly experimental and that users should proceed with caution.
With this launch, it’s interesting to note a couple of different features ETHBTC brings to the table:
- Command-line Tooling – For those looking to short ETHBTC, they need to be familiar with using a command-line interface as there is no current front-end for nontechnical users to provide liquidity. While we expect this to change in the near future, it does show how early-stage this project still is.
- Uniswap V2 – This launch may very well be the first major token deployed on Uniswap V2 – providing the perfect testing ground for the newly deployed ERC20 <> ERC20 token pairs that allow for deeper liquidity by mitigating the need for ETH to be posted as collateral too.
- UMA Governance Tokens – Remember how UMA was all the rage last week because of their Initial Uniswap Listing? Well, it’s time for those tokens to be put to work. UMA token holders can use those tokens to challenge the underlying reference index, effectively posting a bond if they believe the UMA DVM is reporting an incorrect ratio on the index. While this is highly unlikely for this first experiment, it does showcase how the governance token can come into play as more people start creating their own synthetic tokens independent of the UMA core team.
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.
The first priceless synthetic token is now on mainnet! This is a mainnet experiment to validate the priceless tokenization mechanism as a whole. What's interesting about synthetic ETHBTC is that you can bet on the ETHBTC ratio itself – without swapping ETH for BTC or vice versa. https://t.co/grdzczezDb
— Allison Lu (@allilulllc) May 20, 2020
Cooper is the Editor of DeFi Rate. He is an ambassador of Set Protocol and an active contributor to MetaCartel where he seeks to find emerging consumer-facing applications that propel the Ethereum ecosystem. He often works with projects as the Director of Fitzner Blockchain Consulting where he coauthors the weekly publication Token Tuesdays.
Like my writing? Drop me some gwei @ coopahtroopa.eth 😉