,
8 tweets,
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1/ How @UMAprotocol enables "Trustless Tokenization", aka how to create an ERC20 token for synthetic crypto or *real-world* asset exposure in ETF-like format. Mechanics below for creation, re-margining, and redemption (or default): 
2a/ Context: Investor wants gold exposure with notional N and is willing to pay a fee F for this service. Provider is responsible for passing the total return of gold to Investor through the smart contract and earns fee F for doing so.
2b/ Context cont'd: Investor and Provider back their promise with margin. Provider uses digital asset M as collateral, which must be above margin requirement MR at all times. A default penalty DP is assessed if Provider fails to maintain M > MR at all times (aka they default).
3/ Creation: Investor deposits N into smart contract and Provider deposits M into smart contract. Smart contract issues "gold" tokens, worth N, to Investor. Margin in smart contract should always be ≥ value of "gold" tokens.
4/ Remargin: Provider passes total return of gold to Investor, accrues fee F, and if needed, tops up margin by depositing D to prevent default. Smart contract watches for default by checking if Total Margin is still > MR.
5/ Redemption: At end of trade, "gold" tokens are burned and Investor’s margin balance is returned. Provider margin balance is also returned. Investor earns total return of gold and Provider earns her fee F. Both are happy with their trade 😃.
6/ Default (abnormal outcome): If Provider’s Total Margin ever falls below the margin requirement (MR), "gold" tokens are redeemed with add’l default penalty DP paid to Investor. Investor still happy because she earns DP.
7/ Process above details a mechanism to synthetically tokenize real-world assets and basically create ERC-20 tokens for anything with an observable price feed. umaproject.org (and white paper) has more details and/or follow @UMAprotocol for updates on progress.
