In the era of artificial intelligence and blockchain technology, innovative projects such as Numerai are revolutionizing traditional industries. Numerai, a blockchain-based hedge fund, utilizes AI-driven predictions from data scientists worldwide to create superior trading models. This ultimate guide to Numeraire will provide an in-depth understanding of its background, functionality, token economics, and staking mechanisms.
The Numerai project bears interesting parallels with AI-driven platforms such as ChatGPT and AI art generators. As a testament to the transformative potential of AI and blockchain, Numerai’s groundbreaking approach to trading is reshaping the financial landscape. By harnessing the collective intelligence of data scientists worldwide, this platform is creating more efficient and accurate trading models that defy traditional expectations. In doing so, Numerai is not only changing the way we perceive the role of AI and blockchain in finance but also setting the stage for a future where these technologies continue to drive innovation across various industries.
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Established in December 2015, Numerai is on a mission to revolutionize the hedge fund industry by leveraging blockchain technology, artificial intelligence (AI), and crowdsourced stock market predictions. The platform organizes monthly machine learning and data science competitions, where participants, predominantly data scientists, submit trading algorithms related to the stock market. Numerai then uses AI algorithms to evaluate these submissions, incorporating the most promising ones into its “meta-model,” which amalgamates all underlying inputs for stock market trading.
Numerai’s founders identified that stock market-related capital allocation suffers from inefficiencies, which they believe could be resolved by offering a free and open dataset for machine learning. They argue that these inefficiencies stem from the practice of assigning metrics to market data, such as stock prices or dividends. To address this, participants are provided with an encrypted dataset with all standard market data labels removed each month. This encourages users to develop more accurate predictions by eliminating personal biases and focusing on objective historical data. To maintain the integrity of the platform’s trading strategy, the dataset is encrypted.
By offering the dataset for free, Numerai fosters collaboration and open participation from users worldwide, resulting in superior prediction models compared to traditional hedge funds. In February 2017, the company introduced Numeraire (NMR), an ERC20 token, which serves as a means of participating in the platform’s competitions. Users stake NMR tokens to receive rewards for their accurate predictions, and if the overall hedge fund performs well, returns are distributed in the form of NMR tokens.
What is Numeraire?
Numeraire is a unique software that functions as a hedge fund, enabling users to trade equities on the Ethereum blockchain. The platform is powered by artificial intelligence and relies on predictions from a worldwide network of data scientists who use blockchain technology to stake cryptocurrency on specific predictions.
Numeraire offers two applications, catering to various types of traders:
- Signals – This feature allows users to upload stock market strategies that support a particular stock or trading style.
- Tournament – A weekly contest where users submit trading algorithms related to the stock markets, enabling participants to bet on the most probable outcomes.
To facilitate these processes, Numeraire’s native cryptocurrency, NMR, is used for staking on outcomes, processing payments, and rewarding tournament participants. The ecosystem is also built upon the Erasure protocol, a series of Ethereum blockchain-based smart contracts that allow Numerai to reward users who have staked their NMR coins on accurate outcomes or destroy their coins if they were incorrect.
How Does It Work?
Numerai employs an artificial intelligence aggregation model known as the “meta model,” which combines all predictions received from participants within its application network. The hedge fund then trades equities in the stock market based on this model, enabling users to access its suite of products and utilize the models.
The Numerai Tournament is a weekly competition organized by Numerai that gathers market predictions from data scientists and rewards them with NMR tokens. To participate, users submit their predictions related to a dataset using a staking mechanism. The predictions are then analyzed and scored based on their accuracy. Participants who staked NMR tokens on correct predictions earn newly minted NMR tokens, while incorrect predictions result in the staked NMR being burned or permanently destroyed. Although contests are held weekly, scoring and payouts occur every four weeks.
Numerai Signals is a continuous application run by Numerai, where participants submit stock market predictions for a chance to earn NMR tokens. Users provide a signal that reflects a trading strategy for one of the 5,000 stocks available in “Numerai’s stock universe.” While the underlying data used to generate a signal may vary (e.g., P/E ratios, RSI, or social media sentiment), the signals are submitted in a uniform format consisting of stock tickers and numerical target values. Similar to the Numerai Tournament, participants are scored and rewarded based on their target predictions, determining whether they will receive NMR rewards or have their stakes burned.
The value of the Numerai project is derived from the cutting-edge technology used to develop the software, its technical capacity, and the utility it offers. The NMR token, which powers all applications in the system and incentivizes users for their participation in the ecosystem, gains its value from its use case. It is important to note that the project’s intrinsic value, rooted in its innovative technology, may not always align with its market value, as NMR prices are subject to fluctuations.
The market value of NMR is influenced not only by the volatility of the crypto market but also by various specific elements and factors that can affect the token’s price. Users can earn NMR, stake it on predictions, and trade it in the cryptocurrency market. Although the initial supply cap for Numeraire was set at 21 million, Numerai substantially reduced this cap in 2019.
Unlike traditional blockchains, such as Bitcoin, Numeraire cannot be mined. Instead, it is secured through the Ethereum network, which is gradually transitioning to the Proof of Stake protocol with the anticipated Ethereum 2.0 update.
Within the Numerai ecosystem, both users and data scientists can stake Numeraire using the platform’s applications. Users can stake NMR on prediction models, earning NMR rewards if their predictions prove accurate. Meanwhile, data scientists stake NMR to safeguard against tampering with their uploaded market predictions.
As we’ve explored in this guide to Numeraire, this innovative project is a prime example of how artificial intelligence and blockchain technology can be harnessed to disrupt traditional industries. By leveraging the skills of data scientists from around the world, Numerai has successfully created a unique, AI-driven trading platform that challenges the conventional norms of the hedge fund industry.
With a solid foundation in blockchain technology, a unique tokenomics structure, and a strong emphasis on staking, Numerai is redefining the financial landscape. As the project continues to grow and evolve, it will likely inspire further innovations in the realm of AI and blockchain-based solutions.
In a rapidly changing world, Numeraire stands as a testament to the power of collaboration, ingenuity, and cutting-edge technology. By embracing the possibilities offered by AI and blockchain, we can look forward to a future where these technologies unlock new opportunities and redefine the way we approach finance and beyond.