In brief
- UMA released a new smart contract design to generate priceless synthetic tokens.
- The contracts are designed to remove the need for real-time price information during liquidation events.
- Such contracts theoretically could have prevented recent flash loan attacks.
In the aftermath of February’s bZx flash loan attack, several DeFi companies have realized that relying too much on oracles—third party services or blockchains that provide information like the price of trading pairs—can lead to major losses if those oracles don’t update fast enough.
The Universal Market Access Project (UMA) last week released a new type of DeFi contract designed to generate collateralized priceless synthetic tokens, which would reduce reliance on oracles to trigger liquidations.
Multiple DeFi exploits have recently been exposed that rely on incorrect or manipulated data being transmitted from oracles. February’s bZx flash loan attack was performed by generating temporary price differentials to perform targeted arbitrage. In June 2019, another malfunctioning oracle generated a similar but less lucrative opportunity on the Synthetix platform.
In the new design, liquidations are triggered manually by individuals who assert collateral has fallen below the required threshold, which can in turn be disputed by other actors. Only at this stage is information collected from an oracle, allowing verifications to be made after the fact without requiring real-time updates. If an actor triggers a liquidation when the value of holdings in a contract has not actually fallen below the designated threshold, they are charged a fee paid to the actor who disputes the transaction.
Conversely, if an actor incorrectly disputes a liquidation that is shown to be valid, the disputing actor is charged a fee that is paid to the liquidator. Since individuals can access price information from a variety of sources without waiting for on-chain updates, this system eliminates the vulnerability posed by oracles from network congestion or manipulation while incentivizing accurate settlements.
Synthetic tokens are backed with collateral but have floating value tied to a reference asset. For example, UMA previously released the USStocks ERC-20 token linked to the value of the US S&P 500.
UMA says that all previous synthetic token contracts have required knowledge of the value of the collateral at all times, reported by an on-chain feed. The new UMA tokens are “priceless” because they do not require a built-in pricing feed—anyone is able to liquidate undercollateralized positions. In this way, loan security and system-wide collateralization are in the hands of the platform community and far less exposed to the risks generated by network congestion or bad actors.
The UMA priceless synthetic token contracts would also benefit from financial incentives for effective liquidators, adding scale through additional users to the platform in times of major price movements instead of slowing down the system.
UMA has released open source code for the contract design as well as a tutorial for contract deployment and additional technical documentation. The project has also requested comments and feedback on the contract design ahead of an anticipated mainnet deployment in the second quarter of 2020.