UMA Protocol, a decentralized finance (DeFi) project, has approved an innovative contract to create a synthetic token called ETHBTC which would track the relative value of Ether concerning BTC.
This synthetic token would allow users to bet on the relative value of the second largest token concerning Bitcoin. However, the synthetic ETHBTC token would not involve either ETH or BTC for minting.
While introducing Bitcoin's synthetic value (tBTC being the latest project) on the Ethereum network as a collateralized asset has been the trend in 2020, the idea of creating a synthetic token that is pegged against the value of bitcoin and Ether is one of a kind.
ETHBTC Synthetic Token is LIVE on Mainnet‼️ This is the first "priceless" synthetic token created using UMA's infrastructure.
You can now bet on ETH outperforming BTC—tokens are on Uniswap v2🦄.
— UMA (@UMAprotocol) May 20, 2020
This synthetic token would be the first deployment of the UMA project, and they are calling it a priceless token model since it will be built from scratch without the need for any oracle.
Hart Lambu, the co-founder of UMA, commented on the reason behind going for an unconventional defi project model despite it being their first deployment, to which he responded:
“ETHBTC was selected as the first test for UMA's priceless synthetic design because it's DeFi-centric but not too serious.
This first token is still experimental, so it felt wise to choose a product that appeals to hardcore DeFi natives – the type of people that might want to bet on this rate, and who best understand the risks of ‘new' things.”
The UMA team has, however, cautioned users who were enthusiastic about buying tokens to be careful. According to them, not only is the token quite new, but even the concept behind it hasn't been widely tested, and thus users must proceed with great caution.
How ETHBTC Works?
In order to mint ETHBTC, a user needs to deposit DAI in a smart contract, allowing them to withdraw ETHBTC against it. The user can then either trade it in the open market like any other Ethereum based token until the contract expires or increase the liquidity of the ETHBTC pool.
What it does: This token tracks the ETHBTC price ratio and is collateralized in $DAI. It will expire on 1 August 2020. At that time, holders can redeem their tokens for DAI.
Ex: if at expire ETHBTC = 0.03, each token can be redeemed for 0.03 DAI.
— UMA (@UMAprotocol) May 20, 2020
When the contract expires, the collateralized DAI is split between holders and stakers, and if the relative value of the ETH against BTC is higher, the token holder receives a profit and if the value has declined the token staker receives a profit. This means ETHBTC holders would go long while the stakers go short on the synthetic token.
The other interesting aspect of this priceless synthetic token is that it doesn't require any oracle to track the price, unlike many other token systems (see chainlink's decentralized price oracles). Primarily because there is no on-chain activity required to keep this model flowing, and Lambur believes this could be a perfect way to scale the DeFi platform.
In case of any dispute, the involved parties can settle the issue through a vote, and the decision-makers who vote for the winning side would receive the same UMA tokens.
Lambur also explained that the voting would be unbiased since the UMA's economy has been designed in a way that people buying tokens to gain an advantage in the voting process would remain unprofitable. As of now, the ETHBTC can be purchased on Uniswap, which just launched v2.