Umee: Cross The DeFi Waves
Cross Chain DeFi Hub for rates, staking, and interoperability.
The crypto space is so dynamic that innovations keep taking place. Recently, a new project, Umee took the crypto market by storm, revolutionizing the way we can leverage the power of blockchains.
In this article, we delve into what is Umee, its background, the problems in finance that it intends to solve, the technical architecture of the Umee project, and more.
Let’s get started!
What is Umee?
Umee is a cross-chain DeFi hub that collateralizes assets on one blockchain towards borrowing assets on another blockchain. It helps in allowing staked assets from Proof-of-Stake blockchains to be used as collateral for borrowing across other blockchains. Umee is a permissionless, autonomous rate algorithm built as a blockchain that is paving the way for accessing financial markets globally.
Umee can be used as a base layer blockchain and applications can be built on top of it to access cross-chain leverage, liquidity, and debt instruments. The blockchain allows interoperability between the Cosmos ecosystem, Ethereum, rollups, layer two chains, and alternative base layer protocols.
Background Of Umee
The idea of ‘Umee’ germinated when DeFi was treated as the fulcrum of the crypto space. With support from Cosmos and Ethereum communities, there evolved a vision to develop a cross-chain DeFi platform that would enable using the assets of one blockchain across other blockchains.
While the concept initially was launched with a borrowing and lending framework, gradually there is a broader vision to incorporate other applications of DeFi and Open Finance.
Behind Umee’s evolution lies the concerted efforts of a bunch of talented engineers, DeFi strategists, researchers, software architects, and various contributors in the open-source network toward fostering the next wave of crypto innovation.
How does Umee solve problems in finance?
Problem Statement 1: Issue with legacy debt markets
A lot of people globally are unable to access debt markets as they don’t have the required profiles as expected by the debt markets and thus are prohibited from entry to the best capital markets. Though some new forms of debt platforms such as peer-to-peer lending have emerged, they suffer from limitations.
As Umee is a base layer blockchain with a decentralized validator set, anyone with an internet connection can access them. Umee is permissionless which lets anyone access them regardless of their location or financial profile.
Problem Statement 2: Issue with DeFi
Existing DeFi markets are driven mostly by speculation. Rates don’t accurately reflect risk and yields do not come from value add activities.
Instead of relying entirely on current supply and demand to set rates, Umee is developing a term structure for crypto that uses time-to-maturity and creditworthiness to ascertain rates.
The Umee network forms the basis of the technical foundation underpinning the platform. The network is a protocol that implements Gravity Bridge, a decentralized bridging solution to connect Ethereum and Cosmos networks. This mechanism has been developed under the leadership of Interchain Foundation (ICF) in coordination with various teams like Althea, SifChain, ThorChain, Peggy JV, Secret Network, and Agoric.
In essence, the structure of the network includes relayers that relay transactions from the Ethereum network to the Umee network via the Gravity Bridge. Umee plans to develop an IBC connection to be able to connect to the Cosmos network.
Gravity Bridge (Messaging Bridge): It is a libp2p-based gossip network that signs and submits messages across a P2P network, implementing a MultiSig schema and threshold signatures to send approved messages between the chains.
This bridge is aimed at acting as a two-way link between Cosmos and Ethereum networks. Initially, the bridge architecture will make use of Althea Gravity Bridge to transfer Cosmos-based assets to Ethereum as ERC 20 tokens via a mint and lock mechanism. These assets will also be transferred back to Cosmos through a burn and unlock mechanism.
Cosmos Token Modules: Burn and Mint Factories, Alt_IBC_tokens: Atoms, Osmosis, BNB, Akash Cosmos_wrappers(AKA Umee_IBC_tokens)
Ethereum Token Contracts: Burn and Mint Factories, ERC20_Umee_IBC_Tokens: Atom, BNB, Osmosis, Akash ETH_wrappers (AKA ERC20_Umee_IBC_Tokens)
IBC implementation: The IBC protocol aims at bridging assets from other Cosmos-based chains to Umee. It will rely on IBC, a decentralized standardized cross-chain communication protocol.
Network (Umee Network)
A Cosmos-based network to facilitate token transfers. The Umee network is a Cosmos SDK-based chain that connects Ethereum to the Cosmos platform. Once IBC is developed, the Umee network will connect with other Cosmos SDK-based networks and allow sending of assets from other blockchains to the Umee network.
Some of the salient features of the Umee network include:
- Built on the Cosmos SDK
- Launched through the Starport network
- Tendermint Consensus
- Validator Proof-of-Stake
- Relays between Gravity Bridge
Asset Facility Coordination Protocol
This protocol coordinates activities throughout the Universal Capital Facility. AFCP ensures that the record of all borrowers, liquidity providers, and depositors is maintained. It performs the following tasks:
- Loan-to-value ratios are kept at healthy levels
- Loans adhere to the sufficient over-collateralization threshold
- Loans that are under the over-collateralization threshold are sent to the liquidation manager
- Interest rates adjust as a result of changing the supply and demand of assets across the capital facility.
Universal Capital Facility
The Universal Capital Facility is the hub of the borrow position’s activities. Once the assets are sent to Umee protocol, they can take part in the DeFi protocol through the Universal Capital Facility. It will be developed using Ethereum smart contract programming language as well as the Cosmos architecture.
Umee will provide the option to lend on one blockchain and borrow on the other. In the first case, the user will lend on the Ethereum blockchain and borrow on the Cosmos network and vice-versa.
Understanding the collateral tokens
On deposit of assets into the Asset Facility, users will receive an equivalent number of utokens. In other words, the number of collateralized utoken will map 1:1 with the asset deposited. Initially, these tokens are minted on Umee and will then be bridged to Ethereum as ERC20 tokens. The balance of utokens increases with time based on the interest rate applied to the deposits.
As the Umee cross-chain DeFi platform lets you collateralize the staked assets on the blockchain, the user will receive a collateralized token known as metoken. The metoken represents a staked position. It maps 1:1 with the staked assets.
What are the DeFi network components used?
In the upcoming paragraphs, we define the various DeFi network components that help provide necessary functionalities through the Universal Capital Facility.
These entities receive assets from various networks. Depositors add these assets to these units and earn interest. The asset facility comprises assets borrowed by the Universal Capital Facility users.
Interest Rate Manager: Handles the interest rates of depositors
Collateral Tokens: Depositors receive a token as collateral that represents their assets in the asset facilities
Price Oracle: Verifies the prices of assets.
Data Storage Layer
This layer is very crucial as it gathers information on the assets such as the total amount of assets, how much has been lent out etc. It uses Asset Relayers to get the data and ensures that Asset Facility Coordination protocol is working properly to check and monitor the condition of the borrowing/lending ecosystem.
This is essentially the treasury of Umee. A portion of the accrued interest from borrowing positions and from some of the lending activities are kept in the treasury for future use. The reserve is used for emergency funding.
The initial implementation of the Umee Cross chain DeFi platform will permit lending and borrowing across blockchains. A Universal Capital Facility will contain access to both Cosmos and Ethereum network assets. The integral aspect of the platform is that it allows collateralizing staked assets on one blockchain in borrowing across other blockchains.
This ensures that users enjoy earning stakes while engaging in DeFi. Umee will start with a rudimentary scenario where lending and borrowing across blockchains would be possible for users, similar to those on Compound or Aave. As a result, holders of staked assets on blockchains like Cosmos would be able to borrow on another blockchain like Ethereum.
The Umee platform broadly comprises — lenders, borrowers, liquidation managers, and collateral management. Let’s look at each of these entities, one by one.
Lenders: Users include lenders and liquidity providers. Once they lend assets, they receive interest based on what they lent. In addition, once the lenders deposit their assets in the Universal Capital Facility, they receive a utoken as a collateralized token. These utokens can be transferred between Cosmos and Ethereum platforms via the Gravity Bridge.
Borrowers: In order to borrow assets, sufficient collateralization is a mandate. Users can use utokens and metokens as collateral to borrow assets from Universal Capital Facility.
Collateral Management: The collateral manager keeps track of collateral linked to borrowing positions. They make sure that the Capital Facility network is overcollateralized.
Liquidation Manager: Liquidation managers conduct the process of transferring the assets into an auction market so that holders can plan to auction for undercollateralized borrow positions.
The Umee platform implementation involves deposit, borrowing, repayment, liquidation, and redemption. Let’s explore these aspects in the below paragraphs.
Deposit: As the name suggests, it involves a user with assets who wish to deposit them in the Universal Capital Facility to earn interest or borrow assets. The process involves a sequence of steps:
- The user sends assets to Umee address
- Assets are sent to the respective asset facility
- Updates the status on both the networks
- Oracle reads the asset price and updates the state to the Asset Facility Coordination Protocol
- Assets are sent to Universal Capital Facility
- Interest rate manager indexes are updated so that rates paid out to depositors are known
- Equivalent collateral utokens are sent to the user
- Assets are kept in the Universal Capital Facility until they are redeemed, liquidated, or lent out to the borrower
Borrowing: This refers to users borrowing assets from the Universal Capital Facility. It covers the following steps:
- Users choose assets to borrow
- Asset Facility Coordination protocol checks the utokens balance of the borrower to ensure adequate collateral
- User deposits utokens into the collateral manager
- Interest rate manager index updates to reflect the borrowed amount
- The collateral manager checks the condition of the borrowing position
- The user receives lent assets.
Steps similar to borrowing are followed if users wish to repay some of the assets.
Redeem action occurs when users wish to redeem a portion of their collateral from the Universal Capital Facility.
Liquidations take place when collateral of a normal borrow position is undercollateralized due to a reduction in the price of the collateral.
Umee is designed to act as a cross-chain DeFi platform and leverage the lending and borrowing of assets across blockchains. Through its lending and borrowing functionalities, Umee holds enormous potential to facilitate interoperability between systems.
The end goal is to conceptualize and develop something like a decentralized World Bank which will enable the interaction between assets across blockchain networks.