Dispute Resolution: Overlap vs UMA

UMA’s Dispute Verification Mechanism

UMA is a decentralized oracle protocol that enables the creation of decentralized financial contracts and derivatives, while leveraging a community-driven dispute resolution mechanism. In UMA, disputes are resolved through a voting process where token holders participate. The voting power is proportional to the amount of tokens staked, and minority voters are penalized (or “slashed”) for voting against the majority. This mechanism is designed to incentivize honest behavior and ensure that the community reaches a consensus. By exploring the UMA Dispute Verification Mechanism and its limitations, we can better understand the challenges of decentralized governance and work towards creating more robust and fair systems.

Enter The Case of the Missing Submarine

On 18 June 2023, an OceanGate submarine exploring the Titanic went missing, soon after, a market emerged on Polymarket speculating on whether it would be found. The rules were everything but clear:

This market will resolve to “Yes” if the OceanGate vessel in St John’s, Newfoundland which had been exploring the wreckage of the RMS Titanic is found by Friday, June 23, 2023, 11:59:59 PM ET. For the purposes of this market, the vessel need not have been rescued or physically recovered to be considered “found.” If pieces are located, but not the cabin which contains the vessel’s passengers, that will not suffice for this market to resolve to “Yes.”

Well, the submarine was eventually discovered, sort of... Only debris from the submersible was recovered, and as tragic as it was, it immediately raised a question for the crypto markets: Was the submarine really found? Should the market resolve with a ‘yes’ or ‘no’? More than $2M was at stake when the market eventually resolved as ‘yes’ after a round of two disputes.

This process raised a potential issue in the design of the dispute resolution. What if the largest token holders have a stake in the outcome of the market? Can they vote in favor of their own interests during the dispute? The answer is yes, UMA whales were able to coordinate their votes to enforce their desired outcome on the market. The game theory of the dispute mechanism failed because UMA whales knew that their vote would affect the outcome of the dispute, they could coordinate and they would face no significant consequences for not aligning with the crowd-knowledge.

To address these concerns, the following mechanisms could be implemented:

1. Randomized voting: No one should be certain they will participate in dispute resolution before the dispute starts. This would prevent whales from coordinating their votes.

2. Equal voting power: The votes of resolution participants should be equal, regardless of their token balance. This would prevent whales from dominating the voting process.

3. Penalties for coordination: Voters should be penalized if they coordinate and deviate from what the crowd considers true. This would be possible only if voting privileges were assigned directly from the token’s holders.

Overlap is a decentralized oracle that aims to bring fair participation and power to everyone. No one should be able to guide the dispute outcome with their wealth, no vote is stronger than the other, everyone should compete to maintain voting rights with their performance, and everyone should be liable to their voters. This is what Overlap promises.

Overlap is the Accessible Web3 Oracle.