Exodus Asset Spotlight: Numeraire (NMR)
Your Exodus wallet is home to over 30 cutting-edge blockchain assets with an ever-increasing number on the horizon, all of which can be sent, received, and exchanged directly in the wallet. While the histories and use cases of some of these assets are well-known, our team is excited to present a column to explore some of the lesser-known cryptocurrencies and tokens offered in Exodus and analyze their unique value propositions. From revolutionizing messaging apps to low-cost identity verification, each of these crypto-assets is a living, breathing project. Let’s explore the wonders of blockchain together!
Why Numeraire?
Picture this in your mind. . .
It was a dim day. It was a dull day. A drizzle was lightly pattering against a double-paned window as a mid-sized American shut-in (who also happens to enjoy anime OSTs and musicals, I might add) sat inside his room blankly staring at CoinMarketCap and thought to himself:
“There are over 1560 currencies on CoinMarketCap, why not check out like 100 of them that interest me the most? Also, why am I hearing a rumbling noise?”
So that’s what he did . . . right after getting a burrito first.
Numeraire came into view.
The Context
To understand Numeraire, we need to first talk about Numerai: a San Francisco-based hedge fund with an AI system crowd-sourced by data scientists from all over the world.
Numerai was founded in 2015 by a man named Richard Craib. He studied mathematics at Cornell University before working at an asset management firm in South Africa. It was in this financial firm where he first thought up the idea of crowdsourcing machine-learning algorithms. In the world of finance, you are more inclined to conceal the data after developing a successful model. This prevents other people from improving the algorithm and limiting the fund’s potential as a whole. In contrast, Numerai strives for collaboration rather than competition, inviting thousands of people to participate in the fund’s development. How did they do it?
Beginning in 2015, Numerai conducted weekly data science tournaments and paid out Bitcoin to the most successful models. By the end of 2016, the international community of 7500 data scientists built over 500,000 models that drove around 28 billion predictions. The best of these algorithms would be combined to enhance the behemoth AI system that performs the proprietary trades for the hedge fund. Yet Craib still wasn’t satisfied.
Before we find out why, let’s take a look at some of the team, investors, and advisors at Numerai:
- Richard Craib - Founder of Numerai and Numeraire.
- Matt Boyd, formerly at Sensato, as President and COO.
- Joey Krug - Co-Chief Investment Officer at Pantera Capital and Co-founder of Augur.
- Anson Chu, formerly at Uber, as VP of Engineering.
- Natasha-Jade Chandler, formerly at DataProphet, as VP of Communication.
- Dan Glaser, formerly at Two Sigma, as Portfolio Manager.
- Fred Ehrsam (investor) - Co-founder of Coinbase
- Howard Morgan (investor) - Co-founder of Renaissance Technologies and First Round Capital
A heavy-hitting team here 😮
Background and Use Case(s)?
Numeraire has a pretty specific use-case. Its main purpose is to solve the intentional “overfitting” problem in which self-interested data scientists won the weekly competitions by creating models that worked well under historical data, but failed on the live market. Craib also noticed that it was not in the data scientist’s interest to spread the word about the Numerai competitions since more competitors would only cut into the prize pool winnings. This was why Craib wasn’t satisfied.
With Numeraire, all contributors must model the test data, send their predictions, then stake the predictions with NMR. These predictions are put on trial for 3 weeks before payouts are sent. Those with successful predictions receive their staked NMR and also receive additional winnings from the prize pool (the current total pool per competition is $6000 paid in ETH and 2000 NMR). Those with failed predictions risk seeing their NMR destroyed forever. This system encourages data scientists to work together in growing the hedge fund. As Numerai grows, the prize pool will grow with it.
Created in February 2017, Numeraire is an ERC-20 token with a supply of 2.3 million and a current max supply of 21 million. An initial distribution of 1 million NMR was sent to their contributors based on the rankings in the Numerai leaderboards. After this distribution, a fixed number of NMR will be created each week until the maximum supply cap is hit.
My Thoughts
While you may not be too interested in data science to need Numeraire, the crowdsourcing concept that Numerai practices is certainly intriguing. Numeraire seems to position itself as a hybrid equity/currency since some people believe NMR should see more demand in exchanges as the hedge fund becomes more successful. Today, the platform boasts over 30,000 data scientists and over 40 billion predictions.
Still, this also means that the value of this token rests on one hedge fund. A hedge fund that employs methods considered niche and unproven within the industry no less. If Numerai fails, there is no other use case right now for NMR to justify an increasing price. We’ll see how far they go with their vision in the future.
Although there are a few companies and projects who are doing similar activities to aspects of Numerai, I don’t see any major direct competitors. Augur has a staking mechanism in which people are profit-motivated to honestly report market outcomes or else risk losing their staked REP. Another platform called Kaggle helps people and companies to host predictive modeling competitions to their international Kaggle community.
One issue that has been brought up is the type of encryption that Numerai utilizes to hide details of the fund’s trades. While it allows the community of data scientists to build models around the data without revealing proprietary information, there are concerns with data privacy.
Numerai also needs to ensure that the community remains incentivized over the long-term since financial markets are ever-changing. After all, data scientists aren’t exactly out in the streets begging for food and money.
I always like a man with a plan though.
Decentralized hedge funds anyone?
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Enjoy 😉
