How To Use UMA Tokens
Maximizing Returns with UMA
UMA has made a name for itself over the past year — rising into the top ranks as one of the leading DeFi protocols and synthetic issuers. But while UMA’s protocol has become increasingly used to mint synthetic assets, yield dollars, and STONKS, UMA — the protocol’s native token — has been quietly developing a solid use case as a yield-providing asset of its own. In this article, we’re going to take a look at some of the leading yield opportunities, and answer the question: “What can I do with my UMA tokens?” Let’s get started!
Option #1: Sushiswap
Sushiswap has become a leading AMM platform in its own rite in the months since its launch. Originally a fork of Uniswap, it has gone on to implement many new features that differentiate it from its competition.
Sushiswap allows people to provide liquidity to a pair and earn yield in the form of SUSHI tokens and trading fees.
At the time of writing, UMA-ETH LPs receive a 30.25% APR return in the form of SUSHI. This does not include the trading fees, which fluctuate based on trade volume. Please note that out of the 30.25% SUSHI reward, a third is immediately available and the remainder vests over a 6 month period.
In order to become a Sushi LP, follow these steps!
Step 1: Navigate to https://app.sushi.com/farms/permanent
Step 2: Select the “Umami Squid” UMA-WETH pair
Step 3: Connect your wallet
Step 4: Click “Add Liquidity” and enter the amount you wish to provide.
Step 5: Proceed with transactions (gas fees will apply)
Step 6: Approve Staking & Stake LP Tokens
Enjoy your Sushi yields!
Option #2: Voting
UMA’s DVM is the critical component of its protocol, and functions as the community-run oracle service. Whenever a price request or liquidation challenge is made, the DVM manually calculates and votes on the correct answer. Correct votes (based off of staked UMA) are voted with .05% of UMA’s total supply (That’s 1/20th of 1 percent, not 5%!). These payouts are around 50,000 UMA per vote, distributed across all of the correct votes. At current prices, that’s about $1.2M in UMA paid per vote.
Let’s do some quick and dirty math to estimate voting returns.
In the month of March, there were 23 vote requests — which included Admin votes and price ID requests. Let’s assume that, over the course of a year as more projects build on UMA, we average 25 votes per month. Let’s also assume a static price of UMA of $24 (current price).
That would mean $360M worth of UMA would be paid out to correct voters over the course of a year.
Now, UMA’s market cap is currently about $1.4B, but not all of these tokens are used for voting — nor do they all vote correctly. If we assume a typical rate of 30% of tokens vote correctly, a perfect voter could collect about 86% APR on their UMA tokens over the course of a year.
We had to make a lot of assumptions to calculate that number, but that’s a pretty good return!
To participate in voting, simply hold UMA tokens in your MetaMask wallet and navigate to https://vote.umaproject.org/ to get started!
But don’t gas fees kill your return? UMA has been offering gas rebates for several months now, paid out monthly in $UMA tokens. So even if your rewards are smaller than the gas fees, you’ll get rebated in additional $UMA to make up for it.
. Also with the forthcoming implementation of EIP1559, it is hopeful that gas fees will come down and participation increase.
Option #3: UMA Call Options
Call options give buyers the right (but not the obligation) to buy an asset at a pre-determined price by a pre-determined date. UMA has created 1 million call options with a $35 strike price, expiring April 30, 2021. The token is called UMAc35–0421 and can be purchased on Sushiswap. These call options function the same way as European options, which can only be exercised at expiry.
UMAc35–0421 call options are collateralized with UMA tokens, meaning UMA holders can post their UMA as collateral and mint these options — either to gain leveraged exposure to UMA price movements or to sell the options for income.
At time of writing, UMAc35–0421 is trading for about .06 UMA, or ~$1.44.
If you want a walkthrough by Kevin Chan, the UMA team member who is behind the call options design, follow his twitter thread here. And if options are going over your head a bit, start with this “eli5” twitter thread explainer here written by a community member. See here for the full writeup on on UMA Call options in this article.
Option #4: Umanji
A few short weeks ago, Machina Labs announced the creation of an UMA-backed yield dollar called yUMA21. Instead of a monthly or quarterly expiry, this yield dollar will not expire until the end of 2021, and uses UMA tokens as its collateral.
Yield dollars operate in a similar manner to stablecoins, with the value approaching $1 as expiration draws closer. When expiration hits, it becomes redeemable for $1 of the collateral asset.
This asset is eligible for UMA’s Developer Mining program, which gives away 50k UMA tokens per week as incentives for creators to BUIDL their products using the UMA protocol. Machina Labs is giving 80% of its proceeds to LP’s as a reward. They published the following table to help estimate these rewards:
Machina Labs estimates that for every 64–84 UMA tokens provided to UMANJI, liquidity providers will receive 1 UMA per week until the end of the year. This works out to ~62–84% APR on yUMA yield dollars.
Alternatively, users who are bullish on UMA could mint yUMA, sell for USDC, and then use that USDC to purchase more UMA — effectively taking a leveraged position.
To get started minting yUMA, check out this article and how to guide.