I’d like to propose that Numerai introduce a new incentive, where in periods (months or quarters) that the metamodel performs profitability above some threshold, numerai would take a percentage of their trading profit in USD and use it to buy back NMR (a fixed USD amount of NMR each day) for the next period.
I think this would fix a number of the more fundamental issues with the tournament and the currency in a relatively simple and elegant way.
- It gives a clear value proposition to owning NMR beyond the ability to stake it
- It provides a group based incentive whereby tournament participants can actually benefit from helping each other and the community rather than just buy improving their individual model
- It provides demand side liquidity for NMR
- It should help offset the currency risk that tournament participation currently requires
I think the this should be combined with the ability for people to stake on user models at terms selected by the user (the user sets a % of the profit that they take from 3rd party stakes, and stakers can stake on any model they like). That feature could be rolled out significantly later and the buy-back system would be a great positive to the tournament in isolation.
Finally, before I get into the details, I will conclude with an observation. Numerai has stated that their survey data suggests that most of their users are “here for the data science, not for the money”.
That may well be selection bias: eg. the tournament structure and currency risk are unfavorable enough that people who care mostly about money don’t stick around or don’t want to convert fiat or btc into NMR and lock that NMR up so they never join and aren’t included in the survey.
In the current system the only real vehicle for demand growth for NMR is raw speculation or growth in the number of data scientists who want to stake and the average amount each data scientist stakes. If the target market is “data scientists who don’t care about money or risk” then I think its likely this competition will remain niche for the foreseeable future.
Providing a value proposition to holding NMR
Currently, holding NMR without staking it has no benefit besides raw speculation. The buy-back would make NMR holders indirect participants in the funds overall success.
Furthermore, the buy-back would be largest in times when the meta-model had done well, which is when the most new NMR is created and thus the inflation in NMR supply is highest. When NMR is on average burned there would be no buy-back.
Thus the buy-back would not only provide a potentially positive expected value to holding NMR, it would also offer price stability by supporting the price at the times when natural supply/demand is mostly likely to cause price dips and thus should reduce price volatility.
A group incentive
Currently the only incentive for the tournament is purely individual, and in fact, other participants doing well in the tournament is generally a bad thing for a given individual participant.
Generally speaking, from a theoretical perspective, it is not possible to build arbitrary collective incentives that emerge from a set of individual incentives. Currently, besides people being nice, there is not a lot of reason to share key insights or approaches. Some people do this anyways out of inherent altruism, but a well structured business shouldn’t rely on altruism.
Giving everyone in the community some build in benefit to helping each other out seems likely to benefit both numerai and all of the tournament participants.
Demand side liquidity for NMR
As it stands now, liquidating 1000 NMR would cause a substantial price shift. Furthermore, the market of potential buyers of NMR is mainly prospective data scientists who want to buy it to stake. That is a very small set of people and its hard to envision a world where that group would provide enough liquidity to provide stable demand.
As things are now to some extent the small set of a few hundred tournament participants are just selling numerai to each other.
With a buy-back there would be a built in support level for demand in periods where the meta-model is successful, which would make actually realizing tournament gains far more feasible. Furthermore, it gives a much better reason for others to want to buy NMR and should create a positive feedback loop where demand would increase significantly beyond the direct amount of the buy-back.
Offsetting the currency risk of participation
Right now people who want to participate in the tournament have to opt in to a large amount of currency risk in holding NMR. I’d speculate the a large % of the current participants received part of the initial distribution and grew their stake from there.
If Numerai provides all of the benefits that this buy-back system would give, then a lot of the currency risk of participation is decreased.
This is important on a number of fronts, but one of note, is that currently currency risk is large enough that relative to the risk of a given models performance it is a significant factor in the total risk. This greatly reduces the incentive for people to provide low risk models that they are willing to stake large amounts on relative to high risk / high reward models that they can stake a smaller amount on - exactly the opposite of what numerai should want as a hedge fund.