A year ago, Numerai premiered itself as a “new kind of hedge fund built by a network of data scientists.” Unlike a traditional fund that makes trades based on human decision, Numerai lets anonymous programmers write open source trading algorithms based on data provided by Numerai. They pay their programmers/data scientists bitcoin based on how well the programs perform in the market. This obviously creates competition amongst the data scientists as programs that are better able to make accurate predictions will outperform others and earn more bitcoin.
Cryptocurrency Made By a Hedge Fund
A few months ago, Numerai debuted their very own cryptocurrency in order to not only combat the competition within their own fund but to destroy the very competitive nature of Wall Street itself. Called Numeraire, the new cryptocurrency is in essence very similar to bitcoin. However, the system in which it gets paid out creates new incentives for the data scientists. Numerai initially distributed 1,000,000 Numeraire tokens to 12,000 data scientists. The data scientists can then “bet” their coins on how well their algorithms perform. If an algorithm does well, the data scientist gets paid in bitcoin, like before, but also gets their Numeraire tokens back. If the algorithm does poorly, the data scientist loses their Numeraire and doesn’t get paid anything.
Designed For Collaboration
Here’s the interesting part: when an algorithm does poorly, not only does the data scientist who created lose their Numeraire, the tokens are actually destroyed permanently. Through the betting system, everyone is incentivized to build good algorithms because if the fund does well as a whole, the value of Numeraire will go up and everyone will profit. Data scientists are thus encouraged to not only program good algorithms but to also bring in more outside programmers to improve the overall ecosystem. Here is where Numerai hopes their cryptocurrency develops into a strong network effect: the phenomenon whereby a product or service gains additional value as more and more people utilize it.
Will It Work?
There’s one problem, however: if the goal is to create an entire market built on the collaboration of data scientists, Numerai will need more and more data scientists to take part in their betting system. The vast majority of individuals willing to take part in trades are not computer programmers and the vast majority of computer programmers are not willing to take part in trades. Traders outside Numerai’s system will see an advantage of not taking part and competition will remain.
It’s been a few months since the debut of Numeraire so it may be too early to tell. One thing remains clear: there’s hope that a collaborative market can exist, so long as adequate incentives are in place.