Making a bet on the crypto or stock market swings is often considered a form of gambling and we all know the only sure thing is death and taxes, right? Well, in this article, we’ll explore how traders can tip the scales in their favor by making a collective gamble. This idea was put forward in a thesis by South African technologist, Richard Craib. He introduced the world to Numerai, the world’s first artificial intelligence hedge fund which uses Numeraire, its newly launched cryptographic token on Ethereum, to incentivize data scientists to improve its artificial intelligence and better the hedge fund.
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What does it mean?
While we usually make trading decisions by ourselves or assign this task to fund managers or brokers, it is entirely possible to use Artificial Intelligence to make trades. This requires a sophisticated algorithm developed by dedicated data scientists and logicians. Some 30,000 data scientists from around the world are constantly working to improve Numerai and its investment strategy. In return for this, they earn a position on the Numerai leaderboard; the higher they rank, the more Numeraire they receive.
The entire Numerai community works on the principle of “Give more to Get more.” Numerai stands out among all hedge funds with its open-sourced approach to hedge fund investing and collaboration with the cryptocurrency industry. The entire community is involved and benefits from Numerai’s investment approach.
Numerai launched in 2017 at a time when data scientists were being rewarded for improving the investment algorithm for Bitcoin Investments, however, what kept the brand behind was that data scientists were all pitted against each other and the contests started cutting into their own winnings. Numerai then switched to Ethereum, the second largest cryptocurrency by market cap, and developed their own token called Numeraire.
Numeraire isn’t exactly a cryptocurrency but more like a poker chip for betting. Numerai became more successful than expected, in part because of the provision to convert Numeraire to other cryptocurrencies like Bitcoin and Ethereum, or Fiat like USD, EUR. This drove adoption and cryptocurrency exchanges have listed NMR token in their trading markets as its value consistently grew. In April, Numerai raised $1.5 million in seed funding led by a quantitative hedge fund by Howard Morgan and won a Forbes Fintech 50 for 2016 award. Numerai’s model has been deemed ingenious by some crypto-currency futurists.
Erasure and Kazutsugi
Numerai’s vision of decentralizing capital allocation is fulfilled through two crucial elements: Erasure and NMR. Numerai plans to bring Web3 to every application on the internet.
2019 was a crucial year for the Erasure protocol for design and implementation as several applications migrated on top of it with growing community support, awarded grants, and a hackathon to build out more tools and libraries. The platform’s success is measured by how broadly the protocol is adopted, and how much value has been created for its adopters.
Numerai predictions has released Kazutsugi, a dataset designed to increase flexibility in modelling predictions that can be easily monetized. The actual changes may not reflect immediately, but the launch of Kazutsugi and Erasure represents months of research and a big step towards Numerai’s goals of providing the best available data to users while aligning incentives between the staking tournament and the hedge fund.
Erasure: An unstoppable predictions marketplace
Most people rely on trusted sources for information about stocks. Technical analysis, development news, and performance evaluation are all considered when taking a position to buy stocks. This doesn’t safeguard you from risk but there is a greater chance to be on the right side of a prediction with intuitive tools.
We know that the market is controlled by the movement of USD and EUR, and if the tides change and the market crashes, your investment and hard-earned money could be wiped out. Loss and gain are all part of the gamble which is why products like Numerai exist. Knowledge, they say, is power but it could also lead to wealth if AI is working on finding those investment opportunities for you. And here’s the really neat thing about Erasure. If you don’t have the capital for making trades on your own, but your predictions have a history of doing well – You can sell it.
Imagine making a profit from the information in your head; selling those predictions without risking your own capital in a trade, or simply by selling your prediction to a hedge fund and creating value.
Like the name suggests, ‘hedge funds’ hedge the market risk, currency risk, and other risks by making clever offsetting trades to get full value from the information. The fund may combine your prediction with several others and then trade it.
Naturally, your sole prediction may not be as valuable as all predictions combined, plus trading/ acting on those predictions may manifest a smaller return dependent on volatility and risk. It may work better when a hedge fund diversifies and reduces risk on your portfolio. They invest capital of $400 to 500 million and make much larger and smarter trades. But not every seller is credible despite past performances, and there are no guarantees that good or bad performances will continue.
The asymmetric information between the buyer and seller leads to what’s called market collapse. The seller’s information is trapped because no market can form around this data because no buyer can assess the quality. A prospective solution is to signal with brands or third parties and work with them in some small way. Though this is not nearly enough to give a potential buyer of the prediction any consolation, data scientists have been working on a technological solution for quality assessment, like Erasure, a radical information marketplace.
How does Erasure work?
Erasure is a peer to peer, decentralized data marketplace for predictions that allow individuals to sell predictions that everyone can put their trust in. It makes promises about their future performance that anyone can enforce. This is an effective solution to the problem of market collapse. As a seller, you can build a track record that everyone can verify. Your reputation as a good predictor can help you earn.
Every prediction you upload to Erasure has a timestamp and there are thousands of predictions that stimulate Proof of Existence measures. Erasure uses IPFS, a decentralized file storage network, where data is stored in a feed. Erasure sends the address of these stored files, called a hash, to the Ethereum blockchain to get timestamped.
This is important because submitting just the the IPFS hash to Ethereum, the whole file of predictions gets a timestamp. This commits your prediction to the Ethereum blockchain and it’s permanently and immutably registered. Once the prediction is submitted, it cannot be altered thus ensuring credibility and transparency to the prediction and the platform.
Example: If you submitted two years of daily Apple stock price predictions to Erasure and your history shows an 80% accuracy rate, people using Erasure can verify and compare your predictions against price action data and feel confident that you are an authority voice. Imagine being rewarded for credibility and accuracy?
Another interesting option with Erasure is that you have the option to conceal your predictions while simultaneously committing to them. This is predictions gamified and there is a reason behind this. As your reputation grows, more users will rely on your predictions and they are willing to buy your prediction services essentially sight unseen. This means that everyone’s predictions are eventually revealed after the position loses its relevancy, and only recent predictions are concealed. This is how new users will verify the potency and the quality of your predictions. Buyers can assess which prediction feeds have the highest quality and buy, then the information will be traded. They can access it using a special key.
Numeraire (NMR) holders enjoy a wide range of benefits with Erasure. It provides them a whole new use case through decentralization. Data feeds are now trustable. Information that was trapped in social media and prediction platforms is now readily available and its improving the hedge fund industry in more ways than decentralization and transparency.
Erasure has a big buyer side and users have staked over $1 million worth of NMR token across the platform. Traditional hedge funds aren’t on the platform yet, however the transparency and the decentralized approach may bring them onboard in the future. When these funds come in, it will further drive up NMR’s value and more sellers will join the platform. It is expected that over time, Erasure will beat traditional platforms to be the fastest and most effective way to buy/sell predictions.
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