🎙 UMA's Hart Lambur Says The Current Market Crisis Is A Sales Pitch For DeFi

This week on The Defiant Podcast we speak to Hart Lambur, co-founder of the UMA protocol. UMA is an optimistic oracle on Ethereum that aims to record any knowable truth onto a blockchain. He was previously CEO of Openfolio, a personal finance tracking platform, and also a US treasury trader for Goldman Sachs.

We discuss his take on the crypto market and how the current crisis is not a DeFi crisis, but rather a failure of risk management at centralized institutions.

He talks about co-founding UMA, which stands for Universal Market Access, in 2018 with the goal of making financial products and services accessible to everyone.

We discuss Optimistic Oracles, which let any application make requests for any piece of knowable data and allow anyone to respond to those questions, and how they enable decentralized dispute resolution.

There is constant discussion regarding the mismanagement of DAOs and issues surrounding governance. Hart believes that DAOs rely far too heavily on multi-sigs that are cumbersome and inefficient. We discuss Outcome Finance, an upcoming brand that will encompass all the DAO tooling that the UMA team has been building.

We dive into the risks posed by cross-chain bridges and how UMA’s Across bridge uses an optimistic oracle design to bridge EVM-compatible chains. Across is currently running a referral program ahead of its upcoming token launch.

Hart drops some alpha about UMA 2.0, which will improve the user experience for voters on the platform, and says he believes we have barely scratched the surface when it comes to the intersection of NFTs and DeFi.

🎙Listen to the interview in this week’s podcast episode here:

📺 Watch the video here:

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👀 Only paid subscribers have access to the full interview transcript below.

CR: Alright, we're with Hart Lambur. Welcome to The Defiant Podcast. It's so great to have you here!

HL: Cami, thanks so much for having me, pleased to be here.

CR: Yeah, [it’s a] pleasure. So Hart is co-founder and CEO of Risk Labs, the foundation and team behind the UMA protocol. UMA is an optimistic oracle on Ethereum that aims to record any knowable truth onto a blockchain. And he was also CEO of Openfolio, a personal finance tracking platform. And before that, Hart was a U.S. treasuries trader at Goldman Sachs. So a super interesting background, and it's a nice combination of DeFi and Tradfi. Before we get into UMA, oracles, cross-chain bridges, and all the stuff we have planned for this conversation, I want to talk about what's going on in the market right now, especially from your view of [also] having this… tradfi perspective. You were at Goldman Sachs during the 2008 financial crisis, right?

HL: Yeah, I was, which makes me ancient for the DeFi space, I guess.

CR: <Laugh> I mean, I was starting my journalism career, so I was also covering that era. But it's interesting, I'd love your perspective because I've seen people refer to what's going on in crypto right now as crypto's Lehman moment. And since you were [active] during the actual Lehman crisis, how does it compare? How does the crypto crash of the past few months compare with what you saw back in 2008? What other interesting insights are you getting from the current market?

Parallels Between The 2008 GFC And The 2022 Crypto Crash

HL: It's pretty interesting if you compare. So I have a story where during the financial crisis, I'm on Goldman's trading desk, I'm a treasuries trader sitting besides the swap traders, and Lehman is actually going bankrupt. I'm there on the weekend, which is not something you usually do because there's nothing to trade, but I'm there on the weekend because we're trying to figure out what's going on. And the swaps desk, in particular, has no idea what their risk is like — not to the closest billion dollars — because they have all these swaps. There's so much opacity in the swaps market and nobody knows who their counterparty is, whether their counterparty is solvent, whether they're gonna make good on their calls, all this stuff. I'm a young guy at this point, it was wild to sit there at Goldman Sachs, supposedly the kind of the center of capitalism, and they [have] no idea what their risk is because nobody in the market knew what their risk was.

And this is a sales pitch for DeFi. DeFi does solve this, there is transparency, this is exactly what needed to exist back then, where you could see who your risks are. It's transparent on-chain, you can see whether you're collateralized or who needs to be liquidated or all that kinda stuff. That is a wonderful thing.

The crisis we have right now is not a DeFi crisis. It's a crisis of a bunch of centralized entities that are using some DeFi products here and there, but it's a bunch of centralized entities that have no idea what their risks are because they're using centralized financial tools and they aren't using the innovations that DeFi has brought us in terms of transparency and seeing where risks are and all that. So, I mean, again, I think you can say that the Three Arrows thing, and then the contagion into all these other businesses — into Celsius and all that — that does look like Lehman a lot. But it looks like Lehman on the centralized finance side of things, on the traditional finance side of things, not the DeFi thing where Compound and Aave have held up great, as an example.

CR: I think that's such a great point, and it's this issue of counterparty risk is exactly what's been the most damaging aspect of the crypto crash of this year. It's not knowing how much of Celsius is missing, or how much Three Arrows borrowed and how much needs to be repaid, because all of that is opaque and untraceable. And yeah, that looks a lot like 2008. So it's like why rebuild this financial system using crypto? Celsius is borrowing and lending crypto assets, but the cefi entities are not using crypto rails, which actually were supposed to improve on the traditional financial system. But it looks like they're just falling on the same issues that we saw back in 2008.

HL: Yep, a hundred percent. And I mean, again, the crisis [and] the contagion is happening at the institutional level. And at the institutional level, they're using the tools of opaque, bespoke [financial] agreements and unsecured loans, and all of this stuff that's really just tradfi tools that institutions have access to at the retail level… The disastrous part here is that Celsius sold a product to users and then effectively gambled their money away with a bunch of other stuff. I don't know all the details of the Celsius thing and I shouldn't point fingers before I know all the details, but the evidence looks like the retail people all had transparency and then the institutions all gambled their money away. And that seems bad.

CR: Yeah, totally. I'm wondering [what]your thoughts [are] on whether it seems feasible that in the future, most transactions and the financial system will be happening in a more transparent on-chain way. There's a reason why so much money was in cefi, it's just easier to use. And maybe at least there is some degree of a feeling of a safety net, and so on. I don't know if you see a path where more and more funds are going to DeFi so that we can prevent this in the future?

HL: Yeah, I think we could have a very long conversation on that because I've spent a lot of time thinking about this… Another way of framing your question, Cami, would be ‘what are the barriers to cefi using DeFi today?’ And some of the barriers, I think, are pretty real.

Institutions, or centralized institutions, first of all, generally need a concept of an ‘undo button’ where if something goes wrong, they can undo things — and they have that in the form of legal recourse. You go and you sue somebody, DeFi doesn't really work that way. And hopefully later on, we'll talk about how I actually think of DeFi as an invention of law, like a new type of… contracting system, more than an invention in finance, which we can get into.

But the CeFi institutions, they don't have an undo button in terms of legal recourse in DeFi, at least not by default. They also don't have a concept of identity, which brings up all kinds of problems when it comes to anti-terrorism, anti-laundering, and all that kind of stuff. And then the centralized institutions, which are very much regulated, they have regulators that are attempting to regulate DeFi like it's a legal, traditional financial contract when it's just not, it's a different beast. So I think those three barriers, those three hurdles are reasons why centralized institutions are not able to use DeFi at scale right now. And I do think that will get unlocked, but there's a lot of wood to chop there. There's a lot of work to do and I think it's a process, and I think it's gonna move slow. But I think DeFi grows in its own ecosystem and it grows and builds all this useful plumbing like we've seen over the last couple years, and it just gets better and better as sort of a product offering. It just works better and better, and CeFi is gonna want to use it more and more. And then the barriers to that actual usage get figured out as time goes on.

UMA’s Origins and Optimistic Oracles

CR: Yeah, I believe so. I think it'll be gradual and slow, but I believe it'll happen. So let's get into UMA — Why was it founded? What problems is it trying to solve?

HL: So back in early 2018, I had worked at Goldman and had seen all these OTC swaps and derivatives and all that. And I studied computer science at university and am kind of technical that way, and I’m sitting there and I'm looking at smart contract platforms like Ethereum. And to me, it was just an obvious way to write financial contracts. It seemed like a really useful way where you could use a public blockchain to write contracts that enforce payments between two or more counterparties. And so our original idea here, and this is before DeFi as a term was invented, was to focus… on how to make risk universally accessible. How do we make it a protocol for risk transfer? And that brought us down the path of thinking through what sorts of financial contracts, like derivatives, might look like in the blockchain space. But to go back and answer your question, our goal here was to make financial products and services universally accessible, which is where the name comes from — UMA stands for Universal Market Access, and that was the mission.

CR: Okay. So the mission was to make financial instruments universally accessible. And the way to do that initially was through these derivative type of tokens that people were able to build on the UMA protocol. I remember covering it in like the very first issues of The Defiant, covering UMA, the launch, and the early crazy tokens that people were creating. It was [a] very exciting time. And now, I'm really interested in this shift from derivatives and tokenizing different things into more of the oracle aspect of the solution. Why did that shift happen?

HL: Yeah, totally. So to back up, when we're talking about making finance universally accessible, I kind of break financial contracts down into two components. One is the logic of what's supposed to happen…, and the other is the oracle component like the data that's the input to what should happen. And so if you think of an insurance contract as a really clean example here, where an insurance contract says ‘okay, if this event happens, make this payout, and if it doesn't, don't make that payout’, the logic is very simple. [But] then the oracle component is actually arguably pretty difficult here where it's like ‘did that event happen or not?’ And you can kind of work that logic through to everything. So [in the case of] Compound or Aave, [or another] lending protocol, ‘make this loan at this interest rate, and don't liquidate provided that the price stays above this.’ It all kind of works with these two interwoven components.

Originally, we were looking at trying to make markets universally accessible… DeFi doesn’t exist yet… and we were thinking… ‘what do people want to use it for? How can we actually pique people's interests?’ We were figuring that out while we were also working on our own version of the oracle problem. We had a very specific design or idea on how to solve the oracle problem, which we can get into. Originally, we're like ‘well, we have this oracle that can be used to get data for anything, so let's build synthetic tokens. People like tokens, tokens are understandable, let's build tokens that can track anything.’ And that was our original kind of synthetic token concept where we were gonna use this as one type of contract that we could use our oracle to showcase to the ecosystem what this oracle could do.

And people created all these crazy tokens — some that were useful tokens that track the price of gas on Ethereum, tokens that tracked a basket of stocks on Wall Street Bets, tokens that tracked the Bitcoin relative rate which is a pretty interesting one, tokens tracked Bitcoin dominance — a whole bunch of things got produced. But we sort of realized as the market has evolved, the demand for those synthetic tokens, I don't think it's that strong right now. People in crypto are mainly interested in trading around other crypto. And I actually have views that real-world assets, which are kind of in vogue on crypto Twitter right now, real-world assets are not particularly of interest to a lot of crypto users right now. So we realized that our better way of showcasing what UMA can do is to focus on our oracle concept and how it is an oracle that will let you get any arbitrary bit of data, which we can get into.

CR: Okay, super interesting. So the synthetic tokens were a use case or demonstration of what the UMA oracle could do, but instead of following down that path, you guys decided ‘let's just focus on the oracle itself.’ So let's get into what's special about the UMA protocol, because I guess Chainlink is like the big… application or project providing oracles for the blockchain ecosystem. So if you can maybe explain how UMA’s oracle works and how it compares with Chainlink, which I believe is the leading provider at the moment in oracles?

HL: Well, it certainly has a lot of usage, and they do a good job. So Chainlink is used by a lot of DeFi protocols for price feeds, and really the most commonly used price feeds are the price of Ethereum in dollars, the price of Bitcoin in dollars, and the price of major cryptocurrencies in dollars. And Chainlink functions as an oracle that pushes data to the blockchain. So it pushes price updates onto a blockchain periodically and they sign that data to say that it's correct and valid. I do think there are some weaknesses in the design, but… there's a big passionate community out there.

What UMA does though, is very different. [UMA] doesn't sit there and push data onto a blockchain. It functions as what we call an ‘optimistic oracle’. The concept is really quite simple, where any application [or] contract can make a request for any piece of knowable data — any piece of arbitrary data at all, like who won the tennis match last night — and anyone at all is able to respond to that question. If no one challenges that response in a given challenge window, which can be set to different lengths... then that response is taken as truth. So optimistically, we assume people to respond truthfully. And that's the core idea of this optimistic concept. So the difference here is you have to wait this challenge period to get your data, but you can ask absolutely anything that is knowable, and you're not limited to a set of price feeds.

Decentralized Dispute Resolution

CR: What’s the incentive for the people who answer those questions to answer truthfully?

HL: So I'm skipping ahead of some of the details, but at every layer of this there's economic incentives. So the person that responds to a question can get paid a reward, sometimes that reward is not needed. Sometimes there's a natural reason why people want to respond to these questions, but anyone that responds to a question has to post a bond — they have to stake something of value so they have skin in the game. If they get disputed and the dispute turns out that the person that responded originally was incorrect, that original responder loses their bond and it goes to the person that disputed them. So basically at every layer of the system, we have these economic incentives at work that keep people honest, because they have skin in the game.

CR: And who resolves a dispute?

HL: That's where it gets super interesting, and that's the part that we spent a lot of time building… Vitalik [Buterin] wrote a post called SchellingCoin back in 2014, and it was a design for a Schelling point-like oracle system where people voted in secret. You paid the people that voted with the majority a reward, and you penalized those that didn't, and you could show that this system would respond truthfully under certain assumptions — basically under the assumption that no one controlled more than half of the token supply or the voting supply. So we expanded on that and that's something that we built, and that's the premise of what UMA does — it is this Schelling point voting system where token holders, when there is a dispute, they vote in secret, there's a commit reveal scheme, so they vote what they think the truth is. And we prove with game-theory that the system is incentivized to [produce] the actual answer, provided nobody controls more than half of our token supply.

It's a really cool design that's been operating in production for a couple years now… I don't want to say that we've got everything figured out and it works flawlessly, but it's worked better than I expected where we're able to ask lots and lots of questions at the optimistic oracle level. So you can think of this as a layered system. The optimistic oracle, if we stay optimistic, we can ask all these questions and there's no disputes and we just move on — it's fast and easy. And then when there is a dispute, it gets escalated to all of our token holders who vote in this Schelling point voting system. And that has worked really well and resolved a bunch of really interesting questions. Most notably, Polymarket, which is an information market or a prediction market, they were resolving their questions in a centralized way until earlier this year, and they've switched to our system and they're using it to ask like 50 questions a day about who won various sports games, or who won an election, or whether things happened. And that system has just been working in a purely decentralized way, pretty flawlessly, since they switched over.

CR: Oh, cool. How many people are participating in this system, resolving disputes and answering questions? Is it a liquid kind of market? If you can give me a sense of that and how many questions are asked per day? I'm looking to gauge the activity that's going on.

HL: So it's like 20 to 50 questions that are getting asked per day right now. And I mean, it's hard to know exactly [state] the number of people responding because there's some Sybil problems or whatever — like [who is] behind addresses — so we don't totally know. But we do have a reasonably diversified group of people that are responding to these. And Cami, I should actually back up… some of the questions that get asked can be responded to by bots too. Some of them are questions that don't need a human to type in the answer, you can run a machine to do so. So there's a combination of both questions that are being answered by humans and questions that are being answered by machines. We have a fairly diversified [userbase], it's not like hundreds of people, but it's 50ish people that are actively engaged in answering these things. And then disputes are a little bit harder for us to get data on because they don't happen that frequently. But disputes have been triggered every time they need to be triggered, which is good. And there is some diversity in terms of who is triggering those disputes too. So it's pretty cool.

CR: So far, have any questions gone through with incorrect answers?

HL: Not yet. I mean, I'll back up and say that some of the disputes that have been escalated have been things that are contentious, and I think that there is more than one right answer in those circumstances. The right response of the system, in my opinion, should be to predict [and] put forth the most reasonable of these reasonable responses… So some of these get into some technicals, like should we be responding to the question based on the spirit of what was asked, or like very nitpicky about the wording and the words? And I think depending on the facts and circumstances, you can actually look at it and see like, okay, well, both are not wrong, but one makes more sense. And generally speaking, I think this is a huge benefit of our system where we do have human judgment involved here. If something gets disputed, it's getting debated by these humans that are exercising their own human judgment to figure out what the right answer is. And it handles a lot of edge cases much more elegantly than I think you're able to if you just program it in code. So my whole thesis here is that disputes and data are very hard to get absolutely perfect in real-time. I would actually argue, I think it's impossible to get data perfect in real-time, there's always scenarios that don't quite make sense. And so I think that our system at its core is trying to insert a layer of human judgment as the final step in resolving disputes about what the right answer should be.

CR: Super interesting. Do you think people could participate in answering questions and solving disputes as a way of gaining additional income? How much can someone expect to earn from answering questions correctly?

HL: I think so. I mean, again, there's both really cool and kind of scary versions of that too. I think it would be very cool to be able to have an economy running through this, and we do right now at some scale. But we're also not trying to trap people into this machinery and just have them sit there responding to questions. I do think it's not like it's play-to-earn, but it sorta is too. It's like ‘hey, if you can reasonably respond to this question you can make money off of it’, and you are providing [rewards] both on the proposing questions and on disputing them, and the reward for getting a correct dispute is substantially higher. So I think it is really cool if you can have humans watching this system.

If you want a really weird analogy that's actually kind of fun, you can actually think of this voting process as like a human-powered blockchain where every block, every voting cycle is basically one block, and where a bunch of humans are sort of… establishing consensus. And in this case, they're using the Ethereum blockchain as their way of writing down what they all think the right answer is. But as long as we have one honest participant that disputes things, it functions, and I think that's super cool.

Optimistic Oracles In The Context Of DAO Governance

CR: I'd love to hear some specific use cases for this. We talked a little bit before about how maybe this can be used to improve how DAOs are working. We've been talking a lot about DAOs and how the DAO model has worked so far in the podcast. We had Joseph Delong on the previous episode, Hasu too, speaking about their experiences with Maker and Sushi. There's obviously a ton of work to do before DAOs can successfully run organizations. So I’m wondering how [oracles] can potentially… make governance and execution in DAOs better? What do you think?

HL: I mean, I think there's a huge use case there. One of the dirty secrets about a lot of crypto right now and in DeFi and web3 is that there are these points of centralization that usually take the form of multisigs. People kind of hand-wave away and say ‘hey, we have this multisig, but like it's no big deal, it’s not a point of centralization’, but it kinda is, right? I think if you step back and you look at a lot of snapshot votes, like many governance systems that you snapshot, the snapshot vote happens… but then it's up to a multisig to actually go and execute the vote. And the multisig could just choose not to, or choose to veto the vote, or whatever else. And that isn't very good.

One of the cool use cases for optimistic oracles like what we've built is for enforcing contracts, or basically repeating back data that is off-chain onto a blockchain. So in the use-case of governance, a very useful and simple question would be, ‘did this snapshot vote pass?’ You can ask this oracle system, ask our optimistic oracle, ‘did this government vote pass? If so, execute this transaction, if not, don't.’ And it's a very clean and very simple way to get around the centralization of a multisig. So an angle we are actively going down is basically looking at where multisigs are and asking the question ‘could our optimistic oracle replace them?’ And I think in most cases it can, so that's real useful for further decentralizing DAOs and DAO governance.

CR: How would that work? Would a vote have to happen, and then this contract would have to be established beforehand, like a contract that says ‘if this vote passes and is approved, then do this,’ and then the opposite, ‘if it's rejected, then do something else.’ You'd have to write both of those contracts on UMA beforehand, then the vote happens, and then those contracts get executed thanks to the oracle. Is that how it would work?

HL: We can make it simpler than that. So this is something we're launching very soon, [in] the next few weeks too. So we have another brand, we call Outcome Finance, we actually launched this recently. Because we've been creating so many of these DAO tooling things, we wanted to create a home for them, so we created this brand called Outcome Finance.

The tagline is ‘we want to help DAOs achieve positive outcomes’. It's using a lot of our oracle techniques, but we're launching something that we're tentatively calling optimistic governance, and it follows in the lines of what SafeSnap did, to give them credit here. It's basically a connection between a Gnosis multisig and a snapshot. It's a bit of code that we've written that says ‘when I propose my snapshot vote, I include the transaction that I want to have executed in my Gnosis safe, I okay this contract to execute transactions that pass our oracle.’ And then it's a one-button click and it's a seamless process. So now, when the snapshot vote is proposed, if it's passed, it asks the optimistic oracle, ‘hey, I think this vote passed, I want to execute it.’ And as long as nobody disputes it, that transaction will be allowed to get executed in the Gnosis safe. So [it’s] very seamless in some ways, it removes the centralization of multisigs, [and] also makes less work for the multisig signers — they don't have to sit around and sign these transactions. And as a multisig signer myself, that's both a pain and a chore, and also kind of scary cause I don't always know what I'm signing. So we think it's a pretty cool use case, and that's something we're gonna roll out in the next couple weeks.

CR: Oh, nice. Yeah, I think that's definitely gonna be really useful for executing DAO votes. I'm also a multisig signer for my NFT project with Infinite Machine — it's a small project, but it's such a pain, so if things could be done in an automated way, that'd be super helpful. I'd like to get your thoughts on DAOs more generally. Like I said before, I think tons can be done to make governance and [the] management of DAOs better. I mean, the fact that so much of it relies on multisigs is just a huge flaw, obviously. I mean, it's usually five people managing huge treasuries, and that's a huge single point of failure, so that's one aspect that should definitely be improved.

But in general, as someone just observing this space closely, what are your thoughts on how the DAO model is working so far? Do you see it as a viable way of replacing the centralized organization? Maybe it is good in some cases, but not in others? I know some people arguing DAOs are great for maybe doing decentralized investing, but maybe they're not great at being like general kinds of companies. I don't know if in the future a nail factory should be a DAO, it's like not all corporations should be DAOs in the future. What are your thoughts?

The Challenges and Opportunities Facing DAOs

HL: Well, I got a lot of thoughts. So first of all, there are some aspects of DAOs today that are super valuable. [The] Risk Labs team [is a] global team — we’ve got like 30 people in 20 countries, and doing that in a traditional organization is really annoying. [It’s] really hard to try to employ all these people all over the world, it's just challenging and difficult. So I think we should realize that the fact that DAOs are global by default is super cool, super compelling, and useful today.

On the other hand, though, I think some of the DAO thinking is making the same mistake a lot of early DeFi stuff did too, which is just failing to research what has already been discovered. There is a very long history and academic literature around how organizations are constructed around the principal-agent problem. How do you pick a principal that's in charge of some power? …There's a lot of theory here around what organizational structures work well in what circumstances. And I think that DAOs should spend a lot more time looking at that and being like ‘hey, we figured this out like a thousand years ago that this structure works well for this and not well for that.’

The example that I like to point to [is that] Amazon is not run by its shareholders. Amazon as a DAO would be insane — if we asked the shareholders to vote on every decision that… their CEO… is supposed to make, that's completely insane, it just doesn't work. And I think DAOs sometimes make that problem. If you're gonna be doing complicated things, there are gonna be some people that know more and have more expertise, information, knowledge, or whatever else, that you do have to entrust to make some decisions. So if you want the kind of very pure DAO that's run by the individual entities, maybe that does work better for simpler institutions or simpler organizations like an investment club or some sort of smaller type of collectives, I dunno.

CR:Right. It's funny, I think you're right that DeFi DAOs seem like they're building everything from scratch in kind of this separate bubble and ignoring what’s already been done. And it looks like DAOs are now in these growing pains because before it used to be a lot simpler, projects were smaller. DeFi itself was a lot smaller, so maybe a lot of coordination just wasn't needed. But now that all these projects are becoming bigger and are needing to scale is when we are kind of running into these problems where, okay, maybe having tokenholders vote on every single thing is not the best method, maybe a more formal hierarchy and organizational structure is needed. So we are kind of slowly recreating some version of just what a company looks like, but on-chain. So I don't know, maybe… kind of doing everything from scratch… using web3 tools… works out… We’ll see how that works out.

HL: I also don't underestimate that new infrastructures do also invent new things, I think that's true too. Otherwise it could sound pretty pessimistic, like, okay, so we just recreate the exact same structure as traditional companies. Like the Delaware Corp, we recreate that on-chain, and we recreate middle-management, and all these other layers — and then everybody's like ‘that's not exciting.’

First of all, I think it actually would be really useful to do that at a global level, where you have a global company. It's incredibly painful trying to actually run a global company otherwise. So maybe that is useful, that aspect of it, but that infrastructure could also allow somebody to come up with a totally new way of organizing people that hasn't been invented yet. And often with new infrastructure and new technologies, you do invent new things. And I think that's super cool and compelling.

CR: Yeah, I think that'll happen. If all these teams are building these models from scratch using this kind of completely different infrastructure, I think the outcome will have to be different from what's already been created, But I think it will take some things from the old model, [and] I think it'll, it'll end up looking different and, hopefully, better. I think better, that's why we're here, right?

HL: Yeah, exactly.

CR: Going back to the issue of multisigs and how potentially oracles can help remove that central point of failure, a big issue with with multisigs have obviously been cross chain-bridges — they've been super reliant on multisig and that's how we've seen the biggest hacks in DeFi, with these bridges. And it's happened so often now that it's becoming obvious, or at least it's casting this doubt on what used to be a very common perception that the future will be this cross-chain place where different blockchain ecosystems can interact. Now, because so many bridges have been hacked, that's being put into question. So yeah, I'd love your thoughts on how this can be improved.

The Security Risks Of Cross-Chain Bridges

HL: Yeah, totally, I agree, Cami. So bridges have a bunch of problems and they break for a few reasons, but I think the oracle problem is actually the biggest one and people don't always think of bridges as having an oracle problem, but they do usually. Remember that when you have two blockchains, they don't talk to each other, they don't know anything about what's happening on the other blockchain. There are ways where you can build a light client that can read another blockchain, [but] that's a kind of complicated engineering thing. But a lot of approaches that a lot of bridges take is they use a service to tell ‘blockchain A’ what ‘blockchain B’ has done. And specifically, they say ‘hey, if I've sent money on ‘blockchain B’ destined for ‘blockchain A’, they tell ‘blockchain A that and then send the money on ‘blockchain A’ to the user. So there's an oracle problem here where you've gotta communicate a bit of data about what happened on the other chain onto the destination chain.

There are different approaches here. Some bridges are actually shockingly centralized, that just basically have a multisig — sometimes it's a glorified multisig, there are some bridges [where] you're trusting a pretty small set of people to say what happened there or not, and that can be compromised, which can be very bad. It's also risky, right? You can just lose your money, and it's very, very dangerous.

A little side note here. There was a problem here with communicating between shards. Back when Eth2.0 had this multi-shard design — this is way long ago when, before the current Ethereum 2.0 design — how are we gonna communicate between shards? One idea we came up with, and this was just like at our lunch table well before COVID, was effectively using financial concepts like insurance to communicate between chains, or between shards in this case. And the idea was ‘well, if I know a message is worth say $100,000, then I can be the oracle and bridge this, provided I bond or I insure that transaction for $100,000. Basically, you can trust me entirely to report it over there, as long as I posted a $100,000 bond that if I lie to you, you can get back. Does that make sense?

CR: Yeah, I mean, in theory, it does, but who posts these bonds?

HL: You can call this like a relayer, they're charging a fee to do this, and I'll show you where I'm going with this. We took this concept and we're basically saying ‘hey, we can reframe this as an insurance problem where anyone can be bridging transactions, but they can only get paid back — they only get their bond back if nobody says it was a fraudulent transaction, so it's a perfect use case for our optimistic oracle here. And so where I'm getting to is we actually went ahead and implemented this… the same team behind UMA… built our own cross-chain bridge… called Across. It uses this optimistic oracle design to bridge EVM-compatible chains. It's Ethereum to Polygon, Optimism, and a few others are coming online, but we do this at shockingly low cost. It's very efficient because of this optimistic design. And yeah, it's another use case, I think, where [optimistic] optimistic designs… can actually be a more secure and credible way to move information between chains.

CR:That's so interesting. So people can use Across, this oracle, instead of the Polygon bridge?

HL: Yep, we do the same services like Hop or Stargate. We support some different chains. But yeah, it's [the] use-case of an optimistic oracle bridging your transactions.

CR: So practically, how would you go about using this instead of a multisig based-bridge?

HL: It's a front-end consumer-facing application. So you go to Across and you bridge away. It's also been integrated with some aggregators now, too, which is pretty cool.

CR: Cool. How long has this been running?

HL: It's very recent. I mean, we had a v1 one of this, so it was pretty under the radar. But version two, we put out… about a month ago now, maybe five weeks ago. So it's a recent thing and it's been doing good volume. Sorry, I'm not trying to turn this into a pitch for Across, but your users should check it out, it is pretty cool. In our opinion, it solves a lot of security problems too, and it's a truly decentralized and truly permissionless method for bridging transactions or for bridging between chains.

CR: That's super interesting. How much has been bridged so far?

HL: I should know off the top of my head. I think we're over $350M total bridge volume, but I don't have the exact number off the top of my head. I don't know if we've broken $400M quite yet, but we're on our way. So real bridge volumes have dropped off recently in the bear market, the last couple weeks have actually been pretty quiet. But we have this multi-chain world, and as that grows, there's lots of volume to move.

CR: Where are people mostly going, like what chains?

HL: I think right now it's still mostly people going from Ethereum to Layer 2s, which makes sense. Layer 2s are growing, Arbitrum had their Odyssey week, which was a big draw to get people onto the Arbitrum platform. Optimism, around their launch, had lots of reasons why people bridged over there too. So most people are still moving from mainnet Ethereum onto these Layer 2s.

It is interesting in the bear market how gas fees on Ethereum Layer 1 have dropped so much that there's less of a need to move to Layer 2s at this particular moment, but anyone that's a long-term bull on this space knows that's not going to persist, and these Layer 2s are a really important scaling solution. I think the most interesting thing that I want to track is how people move between Layer 2s themselves. I don't quite know what this use-case is gonna be [users] want to move between [Layer 2s] and I'm not totally sure we don't have enough data on that behavior yet, I'm quite interested.

CR: Could you also use Across for that, to reach between Layer 2s? You're right, I don't know whether a lot of people are doing that — it's mostly Ethereum to Layer 2s, not between Layer 2s.

HL: We'll see. I mean, one hypothesis is farmers — if there's a good farm, if they're farming on Optimism and there's a good farm on Arbitrum, then they want to get over there. But ignoring a farming use-case, for the everyday user, I think it's gonna be interesting to see, because it's not clear which of these Layer 2s are gonna be used for what.

I'm very supportive of all these scaling solutions, but it's not clear to me. Like, is one of them gonna become like the NFT Layer 2, and another gonna be the gaming Layer 2? Who knows. But I do think it's important for users to be able to seamlessly move their funds between them. And nobody's gonna want to have to go back to the Ethereum mainnet and go to the other ones, so I think there's a really interesting dynamic there. I do think that as time goes on, we will have data around these bridging flows [and] be able to hypothesize with more accuracy around what is driving flows to different networks.

CR: That'll be super interesting. And speaking of multi-chains, what about non-Ethereum, non-EVM chains? Are you interested in building for them, or… is it better to just focus on EVM blockchains?

HL: Look, I won't lie that I'm generally partial to Ethereum. It's just a cool community on there, and I think it is kind of the birthplace of DeFi. But I'm not at all against other chains, I think there's lots of good stuff happening on Solana and Avalanche. Avalanche is EVM-compatible and very close to the Ethereum ecosystem in some ways too, but I think there's lots of good stuff happening on it. The only reasons why Across doesn't support it yet are purely technical, and we’ll solve them. So there's no axe to grind there. Again, I am pretty interested to see how these different networks continue to evolve in this bear market. Like in the bear market, how [will] the kind of the personalities of these different networks gonna change? I think it's pretty interesting. But I think all of them are here to stay.

CR: Oh, interesting. So do you see a future where there's like this EVM-compatible blockchain ecosystem, but also Solana's thriving? I don't know others as well.

HL: Yeah, like, why not? I think that's not a crazy view. It's really hard to predict though. Like, I think we've kind of got enough data right now to suggest that it's not a winner takes all market for these blockchains. There is this multi-chain world. And yeah, I am partial to the EVM ecosystem, but I also think there's great stuff happening on these other chains, and everybody should learn from everybody else. And it doesn't seem to be a winner takes all market. So why not?

What’s Next For The UMA Team?

CR: Yeah. And a safe way to bridge between these chains will be key, if that's the case. If there's all these growing applications happening on non-compatible chains, bridging will be key. So what's next for UMA? You mentioned this new DAO tooling that will be launching, what's happening in the next few months? What are the big milestones?

HL: There's a lot because we're doing a few things. To zoom out for a second and kind of level-set, I am of the opinion that, for the oracle design space, we're just at the first inning of it. Chainlink has built this great product that's been really useful for a lot of early DeFi innovations. [But] I think the design space is big and there are lots of other designs, like our optimistic oracle, and others that will continue and evolve. I think that that's actually very critical for a lot of web3 use cases. [As] people build more and more different, interesting, or unique applications, they're gonna need different types of data and they're gonna need other ways of getting that data. So that’s kind of like my metathesis in terms of our roadmap for the next few months.

[Regarding] UMA itself, there is an UMA 2.0 release, which really improves a lot of our staking features for people that vote in our system. That's on a roadmap and we're actually getting some of that code audited next week, which is super exciting. And we're doing a lot of work and improving our developer tooling to make it a lot easier for developers to build on this oracle design. This DAO tooling brand we put together called Outcome is launching this optimistic governance framework. This is sort of our version of SafeSnap, which will safely and securely pass snapshot votes through to your Gnosis multisig. So I'm pretty excited about that.

And then Across is doing a couple of things. Across is launching a very interesting referral program that I'm really excited about, a very interesting referral program that kind of turns Across users into their own owners. You earn portions of the network by telling people about it, which I find really exciting. And there is a token launch coming up too that’s completely community done as well. So a very like community-centric token launch coming up later in the quarter.

CR: What do you mean by that?

HL: Well, we came up with this idea of a fair launch back in November when we talked about this. I think we can talk about this experiment and how it's gone. The idea was we wanted to sort of say ‘hey, we've combed over this Across code base, we think it's pretty great. We're not looking to retain too much ownership of this thing, why doesn't the community help us design the token distribution of this?’ So it'll have a token, but the token here is really to give ownership of the protocol back to the community. And in some ways, as we've grown, we tried to see [if] can we work with our community to come up with a token launch plan. And I think we were semi-successful. It required some handholding and some guidance from us, but we're going down that process, and we're trying to really develop this token launch and this token strategy with our community in mind. So it's been a fun experiment and learning experience there.

CR: So this was something you did with the UMA token?

HL: No, the UMA token got launched way back in 2020? This is this whole other thing for the Across token. Again, it's just this whole other protocol for cross-chain bridging that we think works remarkably well.

CR: Got it, okay. And how it is going to be distributed, that’s coming from the community?

HL: It's coming from input from the community. It's a hard thing, how do you achieve consensus if there is no voting mechanism? It's been a bit of an experiment for us.

CR: Oh, right. How do you do that without the token?

HL: Yeah, exactly. So it's like how do you design a token distribution without a token to vote on the token distribution? You kind of get yourself a little twisted thinking it through. But the spirit here has been to do something that's incredibly community-centric and to really build a vibrant community around this protocol. And again, it goes back to some of our questions around DAOs too. Like does this actually always work? I think we do need some leadership around the protocol itself, particularly in the cross-bridge space, which is so hyper-competitive, there are lots of other competitors out there. So the plan around how we do a fair token with the Across community has been pretty fun, but definitely a learning experience too.

CR: Very cool. We'll be keeping track of that. Around when is that expected?

HL: I don't want the team to kill me [for] putting out deadlines or whatever, but like the next couple months, soon-ish. The referral program — I think we might be launching [that] by the time this is published too — but there's a very cool referral program and it's actually pretty interesting where we're gonna run this referral program before the token exists. So it's almost like this early bonus referral program where you're gonna get ownership of this thing that doesn't exist by referring users and by generally just promoting this. So I'm pretty excited to see how that experiment works too. It'll be pretty fun

CR: And then for DeFi in general, what are you excited about in the coming months?

HL: That's such a hard question. I do feel like we are between cycles of innovation right now… We were talking about this just before we started recording too. These sort of bear markets are a very fruitful time where I think a lot of really interesting ideas emerge. I'm actually pretty excited to see what ideas emerge. But I don't have a very strong thesis or very strong gut feel as to what it is now. I think this NFT stuff has really gotten a lot of people into the space, and I think, again, with the bear market coming, that hype-cycle is gonna die down some, but I feel like there's gonna be really interesting innovations around NFTs like that we don’t quite have a sense of yet. But something around NFTs and financing them, like DeFi-related, not just borrowing and lending NFTs, something much more sophisticated. I think there's gonna be really cool shit that emerges from there

CR: Nice. Yeah, that makes a lot of sense. I think it's really hard to predict what exactly will come out of this, but just the amount of people and money that's come into crypto because of NFTs, I think it's a good guess to say that it'll be something kind of NFT-related, one of the big innovations that we'll see come out of this bear market. And then to wrap up, what makes you defiant?

DeFi As A New Legal System

HL: What makes me defiant? I think it's the fact that I want to not so secretly kind of invent a new legal system. Like, I think that is what DeFi is doing at its core. Like I said earlier, I think it's a legal invention, not a finance one so much. So I guess I'm defiant in the sense that I don't really like some of the trade-offs of our traditional legal system, and I want to invent a new way to write contracts that works for everybody everywhere.

CR: I love that you came back to this point because I thought it was super interesting when you mentioned it, and then I forgot to come back to it. So can you expand on that a little bit? What do you mean that it's more legal than finance?

HL: I mean, we talked about DAOs too. Like, DAOs are right now reinventing a lot of things that companies and corporations, or organizational structures, have already done. DeFi has invented some new things — I would argue that AMMs like Uniswap are a new thing that doesn't have a tradfi counterpart — but a lot of DeFi is reinventing things that in tradfi have already happened. Like the finance stuff isn't really that new, what is new is how we are enforcing these financial contracts.

So traditional finance is all enforced by legal recourse. Basically, any financial product and service, when you rip it down, the actual technology behind it is like a legal contract. This is very true with insurance and with derivatives, but even like Robinhood and your stock account — you only know you have that money because there's a legal contract that says Robinhood can't like go and sell your stocks for you.

DeFi has invented an entirely new way of writing contracts… it's just not legal recourse, there's no legal system involved. And I think it's lost on people. How freaking cool that is, that we've invented a new contracting system. And it is literally [that] the DeFi contracts, their underlying technology that enforces them, is entirely different from the legal contract that tradfi is based [on]. These systems have trade-offs. DeFi is global by nature, global by default. And a 14-year-old kid in their basement can go and write a DeFi contract. Tradfi is not global, you only have access if you're within that legal jurisdiction and you have $10M to invent a new financial product, so big differences here. And I think it's super cool that DeFi has come and invented an entirely new way of writing contracts.

CR: Totally, a hundred percent. That's so interesting, and also like a double-edged sword, there's trade-offs. It's fascinating, and it just unleashes this wave of innovation and lowers the barriers of entry to the financial system, and so many good things are coming out of it. But at the same time, it's scary, and maybe not very usable at this moment for institutions who do need that actual kind of undo button, and have some kind of meat-space legal recourse — not just a smart contract that says ‘liquidate this at whatever price’. So I don't know, I think maybe DeFi evolves where you can have everything.

HL: Yeah. I mean, again, software eats the world, right? I'm very confident software will eat finance. I'm very confident that DeFi will eat finance, or eat traditional finance, or we will find ways where traditional finance [and] cefi can use DeFi. I think that's all gonna happen. But yeah, the trade-offs are real and you've seen it in the last few months too, where, again, I think that a lot of the contagion and bear market Three Arrows stuff, that's not DeFi — that is very much the tools of centralized finance that caused that. But DeFi still has a lot of usability issues. There's still lots of reasons why it's got some ways to go.

CR: Yeah. There's a reason why it's still niche, even though it's obviously better in many other ways. Hart, this was a really fun [and] interesting conversation. Thank you so much for taking the time. And yeah, looking forward to how oracles get implemented in all these different use-cases we talked about, seems like something that's just very useful and needed… Really interested to see how this all plays out. So thanks for giving us the alpha here.

HL: Thank you so much for having me, it was really great.