UMA – a decentralized protocol establishing a generalized framework for creating synthetic assets – launched yCOMP to provide DeFi users with the ability to short COMP, Compound‘s native governance token.
1/ Synthetic $COMP (yCOMP) is live on mainnet.
It is now possible to permissionlessly short $COMP.
— UMA (@UMAprotocol) June 26, 2020
With Compound surging to over a $2B valuation within weeks of launch, the introduction of a token allowing users to gain “short” exposure provides the DeFi community with the opportunity to profit if they believe Compound is currently overvalued. More broadly speaking, yield farming has become a recent craze in the DeFi community, driving token valuations to insane levels. This was reaffirmed with the launch of Balancer‘s native governance token, BAL, its surge to a $1.5B valuation (fully diluted). As such, UMA is entering the market with perfect timing.
The yCOMP token currently features an August 2020 expiration. Users who are interested in gaining exposure to the asset can do so in two ways:
- A sponsor who’s shorting COMP – Users will be required to lock DAI as collateral to mint yCOMP where you can then proceed to sell the synthetic token on Uniswap. If the price of COMP falls enough, users can unlock their collateral for fewer dollars than they originally sold it for. The difference is the shorter’s “net profit”.
- A holder who earns a yield on COMP – Users who elect to become a yCOMP holder will be exposed to the price of COMP. When you originally purchase yCOMP (or sell it), the price will actually be lower than COMP. This is because users effectively have to pay the “funding rate” to short the asset, bringing the yToken to parity with COMP as it approaches expiration.
As highlighted by UMA cofounder, Hart Lambur, the yCOMP tokens currently boast a 350% annualized yield for holders of the yCOMP token. On the flip side, users who elect to short COMP via UMA’s new synthetic asset are paying a substantial interest rate to do so. Users could gain exposure to COMP via a similar mechanism on Centralized Exchanges, namely FTX. However, UMA actually offers to the lower interest rate as users who are short on FTX’s COMP perpetual swaps are paying an annualized 1,400% per year to the counterparty.
1/ If we do some bond math, the "yield" on yCOMP is currently an INSANE 350% annualized… however this is less insane than the 1400% annualized funding rate shorts pay on FTX.
More details (and math) below. https://t.co/8sjBkN645V
— Hart Lambur (@hal2001) June 26, 2020
The Big Picture
The introduction of UMA’s yCOMP token provides the DeFi ecosystem with a permissionless mechanism for gaining “short” exposure to Compound’s newly inducted governance token. Unlike the centralized, permissioned counterpart, UMA offers prospective COMP shorts a much cheaper (and reasonable) option to do so. DeFi’s new synthetic asset protocol launched its first token weeks ago – the ETHBTC-AUG20 token which allows users to gain exposure to the ETH/BTC trading pair. The team also hinted at its next token following yCOMP, aiming to provide an identical token for Balancer’s BAL.
11/ (Given the recent craze in #defi, it only seems fitting that enthusiasts have a decentralized way to short popular DeFi tokens. Keep your eye out for the next one from UMA, so that the market can keep in good BALance.)
— UMA (@UMAprotocol) June 26, 2020
This is seemingly just the beginning for UMA too, who coined the Initial Uniswap Offering earlier this year when they sold ~2% of its token supply through Uniswap.
The protocol has another 35M (of the 100M in total) to be distributed to developers and users of the UMA network. We can imagine that UMA will capitalize on the recent yield farming craze to incentivize users to mint new synthetic assets via the protocol, however, no details have been officially released as of yet. The most recent information is detailed in a Request for Comment on UMA’s token distribution which outlines three potential distribution mechanisms:
- Participating in DVM votes
- Building new priceless financial contract designs
- Using priceless financial contracts
We’ll be keen on covering the latest developments with UMA’s upcoming yield farming strategy. Until then, if you’d like to learn how to sponsor and mint new synthetic assets via UMA, you can read up on this guide here. If you’re interested in simply purchasing yCOMP tokens on Uniswap, you can visit the market here.
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.