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What is Numeraire (NMR)? The Blockchain Hivemind Hedge Fund Explained

Numeraire is the result of creativity that meets blockchain technology, creating a sustainable “truth-seeking” protocol for hedge funds and more.

Posted December 28, 2021

Numeraire (NMR) logo inside a bubble.
Numeraire (NMR) logo inside a bubble.

Numerai is a hedge fund based in San Francisco. Unlike most hedge funds, Numerai’s decision-making is determined by artificial intelligence (AI), and the company trades assets without the blunders of human emotion. 

Backtesting (theoretical testing based on past data) as well as current performance have shown that Numerai’s AI can outperform asset management strategies based on traditional data science methods, using a proprietary AI technology called Meta Model.

What is Numeraire (NMR)?

Numeraire is an ERC-20 token, and Numerai hosted the data science competition with an Ethereum application. 

Before Numerai developed the token and the application, the company had already collaborated with anonymous data scientists worldwide to build the Meta Model.

Although rewards were initially paid out in US dollars, data scientists could still benefit from having the knowledge that their strategy outperforms most other ones.

This later changed when Numerai created a truth-seeking protocol called Erasure.

Essentially, Erasure is a protocol where information seekers reward information providers with NMR if the latter provide a satisfactory answer. The main principle of Erasure gave rise to what we know as Meta Model today.

Numeraire logo suspended by two ovals from the left and right.
Numeraire (NMR).

Information sources stake their offer of intelligence. If the information is perceived as having low quality by the buyers, the intelligence provider’s stake can be penalised. In the same way, NMR tokens are being used in both ErasureBay and Numerai to filter noise from valuable insights.

The supply limit of NMR is 11 million, with 5.7 million already in circulation. Upon the release of NMR tokens, no ICO was launched. 1 million tokens were distributed freely among 12,000 participants with the highest activity statistics. A further 3 million NMR are locked for platform development. 

Although it seems that many NMR tokens have yet to be circulated, the role of NMR in rewarding tournament winners is so important to Numerai that token releases are fully controlled.

The token burn is also a mechanism to maintain the value of NMR. In effect, only the best predictors will have access to a large wealth of NMR.

The Meta Model — the hive minded algorithm

Meta Model is powered by a decentralised network of anonymous data scientists who submit market predictions based on their own individual machine learning processing. Upon submission, participants must stake Numeraire (NMR) to demonstrate confidence in their work.

A smart contract built on Ethereum discerns valuable market predictions from the noise. Whoever could predict the market as closely as possible, and has submitted an original prediction can earn rewards in NMR. However, those whose predictions are way off will have their stake burned.

Through weekly tournaments and other reward schemes, Numerai has been able to operate profitably without compromising strategy secrets from other hedge funds or individual traders.

In turn, participants can gain confidence that their strategy is original and functional, on top of being able to earn passive income in NMR. 

Also read: What are smart contracts and how do they work?

How does Numerai work?

The Meta Model is the core technology behind the valuation of NMR tokens. The software incorporates thousands of entries of prediction models in its decentralised network, and evaluates them based on mainly two criteria — how unique the prediction is, and how close the prediction is to real life.

According to Richard Craib, founder of Numerai, the Meta Model selects 200 user-built models that are staked with NMR.

Based on the “skin in the game” principle, Numerai saw a tendency that data scientists who risk money on their models are likely to produce high-performing models.

Numeraire NMR logo on dark blue background.
Of the many possible models, only a few will yield to the greater hivemind.

It’s also noted that submissions are stored on the Ethereum blockchain, which means that each participant’s market intelligence contribution is encrypted using Ethereum’s cryptography.

The software then selects the top 100 models that are unique (that doesn’t have correlations with the population sample of the submitted models).

Note that if models are not chosen, no stake is lost. This only applies for selected models that underperform.

Afterwards, the hedge fund algorithmically trades equities in the stock market based on 100 possible models, adopting new strategies along the way when successful, and burning staked NMR when the model fails to meet the standard.

This in effect makes the Meta Model an ever-evolving trading algorithm that is powered by a hivemind — a network of data scientists who contribute unique intelligence every week and can influence how Numerai allocate its hedge funds. 

What is Ethereum? Read our full guide on the Ethereum (ETH) blockchain.

Is Numeraire (NMR) a successful project?

Numeraire is an interesting application of blockchain technology, where valuable market intelligence can be obtained without trust, using smart contracts and an efficient incentive system.

The idea of Numerai has attracted capital backing from Union Square Ventures, the co-founder of Renaissance Hedge Fund, and even the co-founder of Coinbase. 

At the time of writing, more than $23 million worth of NMR are being staked, with an average return of 11% per three months. This is possible because for users, using the platform is more profitable than any other alternatives. 

In a blog post, Craib argues that using Numeraire is more resource efficient for most people working in the data science sector:

  • He argues that most signals are not profitable enough to be worth trading, unless they are combined with other signals created by other data scientists.
  • Establishing a hedge fund requires a huge upfront cost. Most hedge funds are established for high profile clients. 
  • Using the platform, a hedge fund or any person who can analyse the market can know whether or not that their submitted strategy is original. This means they can decide not to waste anymore time on an unoriginal strategy that could be beaten by fund managers who have discovered it before them. 
  • The minimum stake on Numerai Signals (one of the features of Numerai, apart from the weekly tournaments) is 0.01 NMR, which is currently equivalent to less than a US dollar.

A data scientist who does not have experience in the financial markets could use Python and R scripts to create a working model, two flexible programming languages for data analysis.

This lowers the barrier for more developers to take part in the hivemind project.

Numerai’s project attempts to disrupt the hedge fund industry by sharing market data, rather than keeping them concealed. In a conventional hedge fund, as mentioned before, strategies are kept secret.

This means new hedge funds must waste resources to rediscover existing and unoriginal strategies or models from scratch. 

Are you feeling confident about NMR?

Numerai is the result of creativity that meets blockchain technology.

Although the platform is technically not DeFi in a strict sense, the developers of Numerai have implemented blockchain technology to create a sustainable “truth-seeking” protocol.

This could one day evolve into something interesting and a lot more. 

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Last updated January 11, 2022

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