Degenerative Finance is a collaboration between Yam Finance and the UMA Project to develop a suite of innovative DeFi derivatives, starting with the inaugural launch of uGAS, which tracks and hedges the cost of gas on the Ethereum blockchain, and with many more exciting synthetics to come.
For detailed information on the UMA Infrastructure visit: https://docs.umaproject.org/
Degenerative Finance is an initiative by the Yam community to build DeFi-centric derivatives on UMA’s infrastructure. With the flexible nature of UMA’s system, these products could include impermanent loss hedging, volatility derivatives, TVL derivatives, and more. At heart, we hope to fill a market need that allows for new forms of speculation and hedging in DeFi that can cater to individual and institutional investors alike.
Synthetic tokens are collateral-backed tokens whose value fluctuates depending on the tokens’ reference index. They are created by depositing collateral into a smart contract and minting tokens backed by that collateral.
Up until now, synthetic token designs required the smart contract to know the value of the collateral at all times, as reported by an on-chain price feed. “Priceless” synthetic tokens differ because they do not require an on-chain price feed to indicate whether the contract is properly collateralized. Instead, they have a liquidation mechanism that allows anyone to liquidate an undercollateralized position.
In this design, liquidators can choose to liquidate positions based on their own off-chain view of the reference index for the token, which informs their view on whether the position is properly collateralized. Positions that have not been liquidated are assumed to be properly collateralized. Oracles are only used when a liquidation is disputed — which is designed to be rare.
To liquidate a token sponsor position, a token holder submits tokens to the contract and posts a liquidation bond. The liquidation bond covers the cost of calling the DVM if the liquidation is disputed. If the liquidation is not disputed, the liquidation bond is returned to the liquidator. The tokens are submitted for 3 purposes: to indicate the size of the position to be liquidated, to close the token sponsor’s position, and to attest to the liquidator’s belief that the token sponsor’s position should be liquidated. The liquidator will lose a portion of the collateral corresponding to the tokens if their liquidation is disputed and found to be invalid.
The DVM is an optimistic oracle service available to respond to price requests made by financial contracts that are registered with it. These price requests ask UMA token holders to vote on the value of a price identifier at a historic timestamp. UMA token holders commit and reveal their votes on-chain in a process that can take 2-4 days. Once the votes are revealed, the mode of these votes is returned to the financial contract as the value determined by the UMA voters for the price request. The financial contract then distributes collateral to its counterparties based on the value returned by the DVM.
Because the DVM requires 2-4 days to respond to a price request, it is not intended to be used as an on-chain price feed that pushes prices to financial contracts that need it. Rather, it is complementary to “priceless” financial contracts.
This is the average collateralization ratio across all token sponsors of a synthetic token, excluding those that have been liquidated. It is calculated by dividing the total collateral deposited by all token sponsors in the contract by the total number of outstanding synthetic tokens.
The GCR is used to set collateralization requirements for new synthetic token issuance and to enable “fast” withdrawals.
Additionally, “slow” withdrawals are possible that bring your collateralization ratio below the GCR, but these undergo a review period prior to executing.