Umee: A Layer 1 Blockchain for Access to Cross-Chain Leverage and Liquidity
Summary
Umee is a Layer 1 permissionless blockchain built on the Cosmos SDK, allowing for the development of DeFi primitives and for users to access cross-chain leverage and liquidity. It will encourage better capital efficiency and allow users to collateralize staked assets on one blockchain towards borrowing assets on another blockchain by using inter-blockchain communication protocol (IBC) from the Cosmos ecosystem. As a Cosmos SDK blockchain, the protocol is interoperable with other blockchains in the Cosmo ecosystem to provide enhanced latency, improved scalability and diversified risk from centralized bridges. Umee also differentiates itself from other protocols that use bridges by allowing users to lend and collateralize without creating wrapped assets to get exposure and participate in another ecosystem. This novel idea would essentially allow users to lend and borrow non-compatible currencies.
Overview
Not only will Umee allow users to simply lend and borrow assets across blockchains but it will also allow users to collateralize staked assets on one blockchain (e.g. Cosmos) to borrow assets from another blockchain (e.g. Ethereum). Once the borrower deposits sufficient collateral they will be able to borrow assets from Cosmos or Ethereum blockchains. This would be done by utilizing the uToken collateral token that is used as collateral asset when borrowing on another blockchain. Similar to Aave, users will receive minted uTokens for depositing assets into the smart contract that map 1:1 with the asset deposited. The balance of the user’s uTokens will then grow as the underlying interest rate is applied to the deposits.
When assets are locked on a single blockchain, the uToken that is minted will represent the collateral and will be used to borrow assets on another blockchain. The illustration below shows how both Ethereum and Atom can be locked on their respective blockchain and its uToken is bridged over and used for borrowing the other token on their blockchain.
Source: https://www.umee.cc/umee-whitepaper.pdf
Umee also allows users to collateralize a borrow position using staked assets (meTokens). For example, a user may stake their Atoms and use their collateralized staked assets to borrow a stablecoin. The user would pay interest on their stablecoin loan while earning validator rewards from staked Atoms. Another example would be where a user would stake their Atoms and allow their staking reward to be sold for stablecoins. The user would then be able to take out a loan in the stablecoin. The interest on borrowing the stablecoin would be supplemented by the staking reward earned from their staked assets. Users will be able to liquidate their staked rewards in the tokens they prefer. This would seamlessly allow users to cancel out the interest that they would pay on the stablecoin loan utilizing the staking rewards from staked position. If the user wants to unstake, the staked borrowed positions or “meToken” would undergo a 21-day unbonding period where stake is not earned but still transferable and exchangeable. After the unbonding period, the holder of the meToken will be able to exchange it for the equivalent uToken which would then allow the user to withdraw the asset.
Another byproduct of Umee’s architecture is that proof of stake assets are automatically staked onto reputable validators that contribute Tendermint BFT consensus when they deposit assets into Umee. Importantly, the selection of validators as well as staked allocation will be determined by the governance token. The Umee protocol will include a set of relayers that pass transactions between Ethereum blockchain to the Umee network through a bridge called Gravity Bridge. Assets will also be bridged between the Cosmos ecosystem utilizing IBC to help optimize capital flow across the network. Security is critical when passing and or bridging such transactions. Therefore, the protocol has put into place robust parameters and mechanisms to track and manage various risks such as loan to value ratios, collateralization thresholds, credit ratings and interest rates. Details can be found here.
Source: https://www.umee.cc/umee-whitepaper.pdf
Tokenomics and Mechanism Design
The native UMEE token offers three utility functions. 1) The tokens provide security to the network as they are bonded to validators that stake and provide proof of stake consensus to the network 2) Network fees and rewards are earned in the token by validator infrastructure providers 3) The token is also a governance token used to facilitate on-chain governance for the protocol
The total supply of UMEE tokens is 10B, uncapped with an inflation and deflation mechanism to align long-term incentives for supporters. Based on targeted staking rate the inflation rate will be dynamic and range between 7% to 14%. This dynamic inflation and staking mechanism will be critical in helping to ensure the security of the network.
The UMEE token exists in two forms, a Cosmos version (Native UMEE) and Ethereum version (ERC-20) and can be converted to one another. The native UMEE tokens provides the utilities mentioned above while the ERC-20 tokens simply create a user friendly experience for UMEE to interact with DeFi applications on Ethereum. These tokens will help bring about capital efficiency to its users by leveraging both performance and market dominance of the two ecosystems.
Below is the distribution and release schedule for the UMEE token where significant allocations have been carved out for the community (46%), team (15%) and investors (14%).
Source: https://www.umee.cc/umee-whitepaper.pdf
Macro View
As the number of blockchains continue to increase, success for DeFi will rely on platforms that interconnect crypto markets across all chains allowing for the development of open finance. Protocols that offer decentralized validator set, utilize secure and capital efficient bridging solutions and prioritize user experience will be critical in expanding the DeFi ecosystem. Umee is interesting as it utilizes Cosmos Inter-Blockchain Communication protocol to facilitate relatively faster finanality transfers between blockchains. As a Cosmos SDK blockchain, Umee is interoperable with other blockchains in the Cosmo ecosystem and will improve latency, scalability and risks from centralized bridges assuming they successfully execute on their roadmap. Since launching on mainnet in February 2022, Umee has continued to build throughout the bear market. Following the mainnet launch, they successfully underwent a token launch, validator program launch, web app launch, and an incentivized testnet launch to build out the lending module. As the protocol continues to engage with Halborn for their security audit this month, it will be interesting to see their plans come to fruition this year.
Further Reading and Sources
- https://www.umee.cc/umee-whitepaper.pdf
- https://www.umee.cc/faqs
- https://medium.com/umeeblog/umees-security-audit-report-by-trail-of-bits-353f9a7d6f41
- https://mapofzones.com/?testnet=false&period=720&tableOrderBy=ibcVolume&tableOrderSort=desc
- https://docs.umee.cc/umee/additional-information/asset-risk
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