tl;dr: Removing counter party risk from financial derivates lowers barriers to entry and reduces friction. UMA gives a glimpse at the Decentralized and Democratized financial future.
If you got caught up in either the Netflix or Hulu versions about the disaster that was the Fyre Festival, you understand counter-party risk.
The most poignant part of the Netflix version was when the caterer who was shafted by the organizers talks about her pain at having to deplete her life savings to cover her costs. It was palpable.
Fortunately, there’s a GoFundMe campaign that was raised in her honor, so the social media that fueled the disaster in some ways has come to the rescue. Cosmic justice, perhaps?
In any transaction, there is risk, but what if you could eliminate the risk of not being paid, so that people like Maryann Rolle aren’t innocent victims?
Well, thanks to Tom Schmidt at 0x, I was made aware of the UMA project, and that is part of what they are trying to do.
They have a simple graphic (below) and the blog post that accompanies it does a great job of explaining the value they provide.
They basically solve the problem of de-risking people in financial transactions.
One of the problems that we all have when engaging in transactions is collections.
If you were to make a bet like the one described in the graphic and you won, it’s conceivable that you would spend a lot of time and/or money to actually get the money. That’s friction.
By putting the money in a smart contract and forcing the counter-party to keep the margin requirement (or lose the deposit entirely), the friction is removed from the process.
This opens up worlds of possibilities as you don’t have to worry about collections or having to resort to the legal system, which in and of itself is a barrier to setting up the contract.
What’s more, the position can itself be traded (probably on 0x).
If Bob decides that he wants out, he could sell his position to someone else (think of it like buying a distressed property) to recover a portion of his deposit (cut his losses) and give someone else the opportunity who may want a higher risk opportunity.
Down the road, these types of contracts will happen all of the time and we won’t even think twice about it.
Once you get your head around what the technology enables, anyone, anywhere can engage in all types of derivative contracts without having to worry about the risk.
Oh…and it is 24/7.
There will be schoolkids in Ghana making bets with the same level of access as traders on Wall Street.
When people talk about the democratization of finance, this is what they mean.
And, in the future, the organizers of an event will put money in a smart contract so Ms. Rolle isn’t totally left out to dry.
The Fyre Festival and How UMA project seeks to remove risk was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.