📺 AMA with Hart Lambur From UMA Protocol

okay bankless nation welcome to this community ask me anything we've got hart lambert here from the uma protocol this is a synthetics protocol we're super excited to bring him here today some quick logistics of course this is a community ask me anything so you guys feel free to ask questions we will try to bring those questions into the conversation you can ask them on youtube you can ask them in the bankless members only discord we're making a change we usually do these on thursdays around 12

p.m eastern we are now doing them on wednesdays at 12 p.m eastern so quick change every the i think we're doing it the second and fourth wednesday of every month so this is the fourth wednesday of the month of february we're bringing this to you here david how you doing man oh super awesome you know i've always been curious as to what what the the the spiel behind uma is right it's one of the few protocols that i haven't really done a deep dive into myself so i'm really excited to get

hart on here to to answer some of my questions and then of course also the community questions as well i know that a lot of these viewers for these amas are on periscope right because it's just easy to see on twitter but if you want to get your questions asked go to the youtube chat box i'm monitoring the youtube chat box if you've ever seen me like doing this like looking off to the left it's because i'm trying to get your guys's questions and relay them to heart um so that's what's going on uh always the the youtube chat box is a really fun place to be when we do these live streams um and so get your

questions in there as well and of course if you are a bankless premium subscriber you can also put your questions into the bankless discord where we will prioritize those absolutely all right well before we get to heart we're going to introduce him in a moment but first we want to tell you about the fantastic sponsors who made this ask me anything possible if you are looking for a product that connects your fiat bank account with d5 tokens and products you need to download the dharma mobile app dharma is a non-custodial smart contract wallet and comes with a

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all right guys we are back with hart lambert who's the co-founder of the uma protocol this is a synthetic asset protocol on ethereum we've talked about synthetic assets in the past on the newsletter various other places we think it is absolutely massive uh it has absolutely massive potential within d5 hart how you doing it's great to have you on bank list are you ready for the questions today it's great to be here and yeah ryan david um i am ready for the question

i'm looking forward to chatting with you guys that is awesome all right um so we got to clear this up because you are a former goldman sachs person so you spent some time in the belly david didn't know i was not informed tell us what so what is it like um being in the belly of the beast and in goldman sachs for the time you spent there and then coming to d5 what's what's that transition been like well i learned a lot so okay ryan i

um i'm i'm old for defy as we previously discussed right um um but i studied computer science in university like the true nerd that i am um and honestly when i graduated um i was in new york at the time i'm canadian and there was no jobs there's no startup jobs there's no computer science jobs when i graduated new york startup scene has changed dramatically the only place i could get a job was at a big bank that's actually how i ended up there um and i ended up

as a bond trader through the financial crisis so i was actually the guy trading government bonds um when the fed was doing all their buybacks i was the guy at goldman sachs i was actually selling the fed all the bonds from goldman sachs it's like absolutely hilarious um and so i learned a lot around how markets work how market structure works and how people respond to incentives that's that's just been really fascinating did you learn how bailouts work during that time as well i did learn how bailouts work um i did

learn a lot about monetary policy i'm not actually sure you and i agree on all the macroeconomics here but doesn't matter uh i i really um learned a lot about how markets work learned a lot uh about economics learned a lot about incentive structures and that set me up to um play in d5 really nicely so so what has like what's different about divi versus kind of traditional finance so a lot of people i think in d5 uh it's it's honestly they're learning

finance through defy which is which is somewhat incredible because i think that the best way to learn finance these days is to actually get into defy start using these tools because that's a crash course in financial history but anyway a lot of people entered finance listening to this through defy and don't know much about kind of the traditional financial world uh what should they know about it what are kind of the differences that you see well there's a lot of uh a lot of

a lot of work a lot of stuff has been invented in traditional finance it's just completely unapproachable and completely unavailable to the average person so like the thing that i think is wild about defy is it like makes it possible for some 15 year old kid in his parents basement to like create a financial product like that's a wild idea um it might be dangerous by the way there might be like you know some rug pulls or some bad ideas that get created in those basements but that approachability and

accessibility is is pretty fascinating and if you think about it like when i first started at goldman i i started right when structured products and cdos and all this stuff was kind of getting created or was booming i should say and these were effectively um financial products being engineered within these wall street banks and being engineered actually pretty badly within these wall street banks and defy now is like letting a whole other category of people tinker and

build things and i hope they're being built and engineered a lot better than that stuff was um but the approachability and the ability to actually write a financial contract in your parents basement that is wild and that just does open up finance to a whole different market for people to better understand it alright so let's go into that a little bit more uh i love that juxtaposition between financial financial products from the legacy world versus financial products in the defy world but let's talk about um financial products and

synthetic assets in the legacy world like what is this world world like and what are synthetic assets specifically in like you know the legacy world legacy financial system how do these things how are these things built how do they operate who uses them uh why are they useful yeah well let's talk about like maybe the concept of just a derivative um david so uh what is the derivative what's the point why does it matter um a derivative is a financial contract and in traditional finance it's really a

legal contract and i'll actually come back to this this analogy here too but it's a legal contract so ryan and i can make a legal contract where we're betting on something and it could be um the the value of brazilian equities the brazilian stock market and i'm picking the brazilian stock market right now because it's actually like ryan's in the u.s it's actually really difficult for him to buy the brazilian stock market because of regulations and rules or whatever else um but ryan doesn't really care about

actually owning the brazilian stocks he just cares about betting on whether they go up or down he just wants and so he just wants the exposure so if you are a hedge fund or or whatever what you do is you go and you write a legal contract called a derivative with an investment bank that gives you access to this this type of risk and you can now sidestep the fact that this hedge fund can't actually buy brazilian equities because it's difficult to do so instead they can buy the price exposure of brazilian equities

through this derivative contract and so call that a synthetic kind of exposure where they don't actually own brazilian equities directly they own a legal contract that gives them exposure to brazilian equities and so what has happened here is that hedge fund rather than like not being able to buy something is able to use the synthetic asset to kind of bet on anything and to get price exposure on anything and it makes finance for them global

the problem is that like ryan's not a hedge fund and he can't get access to that um as an individual right he just he just doesn't have the re there's not the resources the wall street bank won't write a derivative contract for them hence because it's a because it's a permission system right like ryan doesn't have like a billions and billions of dollars on his bankroll like what are the other restrictions that prevent because i like i got my roommate downstairs uh we like to talk about the future of finance why can't we just go create a contract between each

other and how is that different than like perhaps a a bigger well-capitalized institution making a contract well you and your your buddy probably could create a contract for each other like david let's say you're in the state of california the two you guys could write down a piece of paper or legal agreement what that thing is and say hey we want to do this and you could probably like like what's your like you could do that but what's your enforcement mechanism there i guess you could go and sue your buddy um in

the state of california if he doesn't like pay up on your derivative contract which would be hilarious but uh it's it there's sort of a barrier to and better write like a multi-million dollar contract in order for it to be worth it to sue the guy you know so it's the same reason why ryan like won't have access to the derivative markets that a hedge fund does because he's just not a big enough fish to like go after you the enforcement mechanism this legal

enforcement mechanism only works at like a big scale for huge entities writing these contracts defy and frankly what we're doing is designed to change that to make that be uh accessible at a much a much more approachable like a much lower entry point lower the barrier to entry david just uh uh just just you know i think it's bad news for roommate relations to write derivatives with your roommates yeah just maybe and this is like a big picture question

because when you when you talk about terms like derivatives heart i want to make sure people understand this um i think a lot of people have seen this graphic have you seen this heart it's like money around the world right and like this is comparing the world's money in markets uh 2020 and it's very visual right so you've got each each size square is worth a billion dollars so you've got silver here 100 billion dollars with one square and then you've got the size of cryptocurrency and then you've got like military spending and it's size that's cryptocurrency this metric needs to get significantly

updated because it says it's 244 billion dollars this was made a while ago yeah so i guess like add like eight blocks or so whatever right but it's like it's like close um all right so then you've got u.s budget deficit on you go and you got billionaires how much they own then you've got the the you know how much for gold 8 trillion 10 trillion in this calculation 11 trillion fortune 500 anyway you get all the way down you pass global debt you pass real estate uh global real estate holy going

past real estate which is huge okay real estate is how big is real estate god that's before global debt i don't know i miss real estate it's somewhere in here um then you've got global wealth but then you've got this big thing at the end which i think is the stunner which is derivatives okay if all that other stuff real estate stocks global debt you thought that was big you get to the end of this graph infographic and you see derivatives and it's like 560 trillion worth of global money is in derivatives and you keep scrolling down

it takes a whole bunch of scrolls to see all of the value and derivatives um can you explain that like is this good is this healthy is this how markets work or is this just is there a real problem here this this sort of stuff is a bit of a misnomer um because you have a lot of um uh offsetting risk so um ryan you and i make a billion dollar derivative where you're going long bitcoin and then you unwind it later but

you don't actually unwind that trade you just do a derivative in the opposite direction for a billion dollars so now we've got a two billion dollar derivative uh derivatives outstanding and the way the derivatives market has evolved there's just all of this offsetting risk which by the way part of the problem here part of the problem in the financial crisis is that nobody actually really had a good picture of that offsetting risk because it wasn't written down any like in one place and was the issue was that it wasn't actually offsetting correctly was that the issue or people didn't know what was

offsetting right people like there was like sort of just uh like oh i think like i was actually on the goldman sachs derivative trading desk unlike when lehman's blowing up and goldman doesn't really know what risk they have to lehman brothers they kind of think they know but it's like if you're when you've got numbers like that if you're off by a little bit it could be like billions and billions of dollars right um and so you know frankly there's a whole other thing where if you had a blockchain you had all those derivatives

written on the blockchain where somebody could actually go and look at really articulate precisely what the risk was that to me reduces systemic risk a lot this is a whole other conversation right of just um but this is where i think d5 is going and why i think going back to what i was saying earlier in 2006 when people were inventing cdo cubes or whatever um there was not a lot of transparency you know what the underlying risk of those products were if you put them on a blockchain it's a

hell of a lot safer because people independently can see like okay here's what this thing is um and so to me finance is meant for a blockchain like finance and what people's contracts are should be written on a blockchain because it provides a lot more transparency um into where things are going this is a big conversation that i've had with a number of big corners is that you know bitcoiners will point at defy and be like look at all that risk look at that composability risk like if maker dow goes down the whole thing goes down we're just going to recreate the financial crisis and that's never made

sense to me because i i would say that financialization and financial tools can can be dangerous um i think warren buffett has this quote that like finance could be like create weapons of mass destruction but it's i totally see that like there's a fundamental difference that when everything is done in an inside out fashion and everyone has equal access to information and that information is actually consumable that is what prevents something like an 08 crisis right it's like we just didn't have the information because people only

had a very narrow view of what they were able to see and no one could have the big picture and now we have things like dune analytics and like the graph which lets us help us consume data and that i think is really the fundamental difference that you know if we had ethereum as the financial platform the 08 crisis wouldn't have happened does that how does that land with you heart i agree man like listen this is a controversial statement and some people will uh push back on it but like at a minimum you take these mortgage-backed

securities that blew up in 2008 and the reason why they blew up is nobody knew what was behind them nobody knew what was in these mortgage-backed securities right they had to basically trust some bank or then some credit agency um and those guys didn't know either it was it was bad think of trust actually here there was too much trust baked into the creator of these products that couldn't be verified as to what it was and so if instead that structure if you were to make imagine a sort of ethereum based

version of it there's some wrapper that includes a bunch of like loans but you can actually go and look at those individual loans on the blockchain um and you can verify with yourself trustlessly what's happening there that is so much safer um and so i agree david you have the ability to view source on like financial tools and financial products which is super powerful you know before i get off the infographic one other question i have heart is this um so if you scan the infographic you

look at traditional finance the other thing that kind of jumps out at me is like the base money the reserve assets are relatively small and then like the derivative assets are absolutely massive so like multiples of the the reserve based money assets right so you've got kind of your your your layer 1 m1 money that's tiny and then everything built on top gets bigger and bigger and bigger until you get derivatives and they are the biggest of all over 500 trillion do you expect the same thing to play out in this new

financial system that we're building in d5 where you have a relatively small kind of base money reserve asset and then you've got like things built on top but derivatives are the biggest from a notional value perspective of all does that play out here too yeah i just don't know if you call them derivatives like there may just be something different there's room for like new new to get invented here but like ryan i do agree that what you will see

at some level is like a base asset a reserve asset which you know ethan's money right so we can eat but you have a base asset and it gets used in all these ways that then the notional value builds up and you're already seeing that happening in d5 where like your base asset is eth which is used to create dye and then you take the eth-die pair and that can be used as collateral to take

something else you're already beginning to see this happening um and i think that is the nature of uh finance with leverage and debt um happening that's just the the way it works heart let's get into some of the more specific details about uma um and i think a lot of listeners there are mental models around synthetic assets we'll probably begin at with synthetics which uses train link oracles to come to a consensus about what the price of an

asset is how is the what is the uma model for producing a synthetic yeah i think the mental model to think about here that i i actually want to think of it as almost a primitive that we're putting forward and um if you if you go back to the early days of maker where maker was single collateral dye where it would only had eth in it what happened there you took uh eath and let's call let's

make it raptease let's call it an erc20 asset you took each as a collateral and you created a derivative token a synthetic token die that was deemed to be worth there's a payout function it was deemed to be worth a dollar of each that was what dyes were supposed to be worth they're supposed to be back what we've built is effectively a generalized version of that concept where we call it a a synthetic token that takes an erc20 collateral

and takes a payout function and creates a synthetic token a derivative token that is some amount of that underlying collateral as defined by this payout function and so this is actually a surprisingly powerful primitive because we can do all kinds of crazy things where we convert or transform one erc20 asset into another the difference to point out because you mentioned synthetics synthetics has a

different just a very different model where they have a pool a debt pool that's everybody staking their snx to to create this dead pool and out of that debt pool they allow users to buy synthetic assets so all synthetic assets in the synthetics platform are collateralized or backed by this single debt pool whereas what we're doing what we proposed is it's actually much more of a component it's a single primitive that an erc20 asset goes into this

contract to mint a derivative token according to some payout function so there's a big criticism of the synthetics model is this like systemic risk conversation where like this one single pool of debt if that doesn't work out all synthetic assets crumble it seems and so the takeaway that i just got out from you and correct me if i'm wrong is that uma as a more as a primitive doesn't actually depend on one single pool of debt it uh is more modular between like the input asset and the

output asset is that correct yeah that's that's that is correct i mean again i i think i actually have a lot of respect for the synthetic platform and all that just to be very clear and i think they're doing like really fascinating stuff and the whole deep ecosystem um should be thankful to a lot of their innovations and the way they push things forward so say that clearly but yeah there is a pooled risk approach here that um is true for other platforms like compound has the same issue compounded the any asset it's got

us if any asset fails the whole thing fails there's similar arguments that can be made to some of these other pooled platforms david what we're kind of producing is more we really think of it as a developer infrastructure so developer can come to us and take our contract take our primitive and say i'm going to segregate this pool where i'm going to create a synthetic asset that's backed by just this this one erc20 in its own sort of segregated pool and that has pros and cons it's kind of

got its own um different use case i think there's one one kind of takeaway here is if this is if you're listening and this is kind of your your first exposure to synthetics like the magic moment for me and understanding it was back to heart's example of of dye like once i wrapped my head around dye and understood that then i started to understand what uh what a synthetic is and it's basically if you take an erc20 like a store of value right whether that store value is wrapped bitcoin or ether

or whether that's usdc so you take a store of value and you combine that with an oracle like so with the price feed store value plus price feed in a smart contract platform equals anything you could create anything you want out of it you could create s p 500 you could create like you know um gold silver any commodity any asset anything that has value you know the art on david's wall anything basically so that that to me is

is why this this synthetic primitive is so powerful because we have a lot of store value erc 20 assets right and we've made a lot of like strides forward to create great oracle solutions now we have even arguably like more decentralized oracle solutions like the uniswap uh t-wap uh and now we can create anything um and by the way this is the the notion if you've been following bankless for a while the notion of why economic bandwidth is so important what we mean when we say economic bandwidth is just

the the market cap and the liquidity of that store of value asset and it can be either you know centralized like it like a usdc or it can be more trustless like eth but anyway that's the combination store of value plus oracle equals any kind of asset that you want is that is that a good way to think about it i love that i'm gonna steal it and use it ryan um but it's alchemy right it is alchemy where you're taking store value erc20 asset plus

price feed right to any other thing and it actually probably segues nicely into what our oracle solution is which i'm not even sure you guys have like we're pretty quiet about that or it's a bit under the radar a bit more nerdy but we have this whole philosophy on how to we're written something we're going to label this the optimistic oracle our whole solution to this is to not rely on a price feed um but to actually try to create these things where we only need a

price if there's a dispute and i can go in a bit more detail but this priceless methodology that we've adopted this optimistic oracle allows us to essentially create a price feed for anything which if you take it back to your model of what you just described um if we have store of value so erc20 asset plus price feed for anything it literally lets us create a derivative or a synthetic asset for anything

and this is where i think our i think the ability to create new to actually dream up assets that didn't otherwise exist suddenly becomes possible so we could if we wanted to make a price feed if the price fee for anything could be the the the number of subscribers to your guys's youtube channel right all of a sudden we can make uh a synthetic asset that actually tracks the value of like

the number of subscribers to your guys's youtube channel um and i think this becomes super interesting and kind of fun yeah it's it's basically back to that that kid in the basement that kid in the basement can go create a synthetic of anything a value and then go trade it in this platform that's the magic of it the other magic of it i think is when we're talking about defy permissionless open decentralized finance this is what solves the game stop problem right like we could like rather than robin hood stopping trading on gamestop we can

create these synthetic assets in ways that they really can't be stopped by a centralized intermediary so so that's par powerful too okay so i'm i got to confess the heart i don't fully understand the priceless oracle thing and i'm not sure we have the time to get into the technical detail like i have my head wrapped around what chain link does like i understand that all of these various oracle like i understand that i understand uh unit swaps um oracle at like a you know a decent level but

how is your priceless oracle different is there like an explain it like on five just for that yeah the way to think about this is where we're enforcing our contract optimistically and you can actually think like frankly a lot of the thought process came from conversations we had with the plasma group which is now the optimistic team and optimistic grow ups like same concepts here the goal here is let's minimize oracle usage let's only use the oracle if there's

like a genuine dispute effectively in like layer 2 like an exit game um and the way to think about this in um uh in a traditional is actually more like a traditional legal contract back to david's derivative agreement that he wrote with his roommate right in that derivative agreement david wrote with his roommate this legal contract you hope you don't have to sue the other person to enforce it your goal is to not go to court and litigate this thing your goal is just that you you only use

court as uh an enforcement mechanism so that like wait if you don't follow the terms of the contract i will sue you the very high level understanding for our optimistic oracle is the same concept where we don't use the oracle um in 99 percent of the cases and actually it's more than that we only use the oracle to get a price if there is a dispute in whether okay so this seems like there could be some