Expanding DeFi with Umee’s Universal Capital Facility
This article originally appeared on the Figment blog on November 30, 2021
Umee: Free-Flow Connectivity
As monolithic blockchains are beginning to show their age, products like Umee are directed at increasing multichain access to the immense amount of value that has been created on these networks. Umee can be described as a Cross Chain Lending Hub that can collateralize assets on one blockchain towards borrowing assets on another. The platform specializes in allowing staked assets from Proof of Stake (PoS) blockchains to be used as collateral for borrowing and lending across a variety of blockchains to increase capital efficiency. To achieve stability in its products, the platform uses a combination of algorithmically determined interest rates based on market conditions. As a cross chain DeFi protocol, Umee is designed to allow a multitude of DeFi product combinations between IBC-enabled chains, and was created to solve three main issues in DeFi:
- Detached Yields;
- Concentrated Systematic Risks; and
- Isolated Capital.
IBC and Beyond
There have been a lot of projects directed toward connecting different DeFi protocols, and Umee is no exception. Umee will achieve interoperability through the Cosmos network’s Inter-Blockchain Communication (IBC) protocol and Gravity Bridge. As a result, the most immediate and apparent benefit will be connectivity between Ethereum and Cosmos, and easy access to their respective products by participants of both networks.
Umee’s use is not limited to acting as a multichain bridge, but will also act as a method for increasing liquidity and flexibility for yield-bearing assets. With Umee, assets can now be used as collateral for loans on other networks, and through IBC connectivity and Gravity Bridge functionality users can stake yields generated from different networks. This use case alone would allow for a vast range of money lego opportunities, even resulting in minimal or negative interest rates depending on the yield opportunities and borrowing rates selected from compatible chains.
The Team
The team behind Umee have substantial experience in both the Ethereum and Cosmos ecosystems. Founder and CEO Brent Xu previously worked as a bond trader before joining Consensys, followed by Tendermint. At Tendermint, he helped develop strategy for the Cosmos ecosystem and the IBC protocol currently being adopted by Cosmos and many other networks. He is supported by 14 other employees with backgrounds as varied as his.
Understanding Umee’s Universal Debt Facility
The central point of contact with Umee users is the Universal Debt Facility (“Capital Facility”), which is the starting point for accessing additional DeFi products on other chains. To access the Capital Facility, users must pass assets through the Umee Bridge System (“Umee Bridge”), which allows users to port assets on one chain into another. Users may send assets from other networks via the Umee Bridge and convert them into the following tokens, which may be used as collateral in DeFi products on other networks:
Lenders — uToken
If a user deposits an asset and wants to lend that asset, the Capital Facility will issue a collateral token to the user, known as uToken. This is an ERC-20-compliant token that represents the Cosmos collateral position on the Ethereum network, and will grow in parallel with the principal amount and the interest it generates.
Stakers — meToken
If a user wants to stake their asset in Cosmos, they can send their tokens to Umee for staking, and will be issued a meToken that represents their staking position. Similar to uTokens, this token grows in parallel with the staked position, including the yield generated from staking. Users can unstake their assets by proceeding with the unbonding process required by the underlying asset and exchanging meTokens for the original principal amount.
Borrowers
Users can borrow assets from the Capital Facility by depositing either uTokens or meTokens as collateral, but in order to do so the desired position must be overcollateralized to a sufficient degree. This can be done with any asset deposited on the Capital Facility with sufficient reserves, including both Cosmos and Ethereum at present.
Collateral Managers
Participants who operate the Collateral Manager protocol keep track of the collateral tied to Borrower positions. This type of user serves in an ombudsman capacity, ensuring that the loan-to-value ratios are maintained for over-collateralization of the Capital Facility as a whole and that Borrow Positions are sufficiently diversified.
Liquidation Managers
If a position is under-collateralized, Liquidation Managers initiate the process of moving assets into an auction market for these under-collateralized Borrow Positions. Liquidation Managers are also notified by Collateral Managers when loan-to-value ratios rise above the necessary threshold of over-collateralization, at which point they will begin selling the loan on the open market. To incentivize immediate purchase, the loan will be sold at a heavy discount in exchange to unlock the collateral. However, Borrowers can avoid this by adding additional collateral to their Borrowing Position to maintain a healthy loan-to-value ratio.
Present Status
Umee raised $6.3 million in seed funding earlier this year in a round led by Polychain Capital along with Figment, Coinbase Ventures, IDEO CoLab, Alameda Research, Tendermint, and ConsenSys, among others. The core Umee protocol is still in development, but the testnet has been open since late August after moving on from beta testing.
What’s Next
The Umee Team expects a Q4 mainnet launch date. Figment is an early supporter of Umee, and we have been a testnet validator since early November. We are excited to continue supporting Umee leading up to, and after mainnet launch.
Upon successful mainnet operation, expansion to other IBC-enabled networks is expected, with a focus on protocols that are DeFi-heavy. Future developments are expected to align with Umee’s long-term goals, which are to enable interchain lending and borrowing, multi-chain staking and delegations, and reliable cross-chain DeFi rates.
