NMR price and value

I’ve said before that figuring out how to value Numeraire (NMR) is the hardest open problem in economics today. So here’s what I’ve got so far.

Numeraire value is some combination of all, some, or none of these:

  • discounted future value extracted from all staked data on the Erasure protocol
  • value as a “source of scarcity”
  • value as a reserve currency for many staking applications
  • residual network value from capitalization, growth, speculation

Uncontroversially, NMR’s price will be whatever someone else is willing to pay for it. If there is more buying volume than selling volume, the price will go up. If there is more selling volume than buying volume, the price will go down! What someone else is willing to pay for your NMR is a function of how much they think they can earn from holding, staking, or paying with it. (So, the only way to “value” a token like NMR is with long-term expected supply/demand.)

A good way to figure out how long term supply/demand equilibrium of NMR will be set is to see what happens at logical extremes. In one possible extreme, imagine Numerai has already paid out all of its NMR and has to buy NMR on the open market to pay users based solely on the profits of the fund. In that case, is the equilibrium met when the value of NMR is equal to the net present value (NPV) of all future payments from Numerai? To estimate that, you’ll need to model out Numerai AUM, expected rate of return, etc, into perpetuity.

In isolation, the NPV of future payments approach has a problem because it assumes the network and protocol will look exactly the same in the future as it is now, and that is obviously not realistic. Currently, NMR represents a sort of license to do machine learning work for Numerai. Staking must be done with NMR. We’ve already seen a pivot to DAI staking and NMR as a “source of scarcity” in ErasureBay. We also know that Erasure can enable many more dapps to gather information with staking/griefing/burning primitives. Will that staking be done in NMR, DAI, or something else? All of those details matter a lot.

Since NPV of future payments by Numerai doesn’t scale if we assume other hedge funds or dapps start building or participating on Erasure, we need to generalize. For simplicity, if we assume all staking and payments are done in NMR, then should the generalized value of NMR be the net present value that can be extracted from all future data staked on the Erasure protocol? Interestingly,the NPV extracted from all that data increases as more sophisticated players enter the NMR market to extract more value from it (e.g. other hedge funds buying users’ Numerai Signals data). More buyers, better value creation/extraction, more data, more buyers. Financial network effects.

Now look at another extreme, which is what would happen if one user owned all of the NMR in circulation. In that case, that user would have a monopoly on the ability to earn rewards on Numerai, and so he/she can earn either 1) whatever price Numerai is willing to buy NMR from them (only to return it right away) or 2) nothing because Numerai won’t play this game and the price/value collapses to zero.

This means that the network–the fact that many people are participating, coordinating, and exchanging–itself has value and so NMR does not only have value to the token holders who also stake on their holdings, but also to passive holders capitalizing the network who are earning residual value if usage in the network grows.

What other extreme situations shed light on how someone might value the entire network? If all Erasure dapps had DAI staking and NMR was only a “source of scarcity” like in Erasure Bay, why would anybody want to own NMR?

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A couple of potential ‘extreme situations’ from me (Joakim here - I have like 3 forum accounts and I don’t know how to merge them).

  • The value of any cryptocurrency assumes governments won’t ban the use of them. If they do, the value of all crypto would approach 0. Maybe not a ‘probable’ scenario, but it’s at least ‘possible’ but maybe this probability is already discounted in the value of crypto in general?

  • Since NMRs can only be burnt, assuming NMRs will continue to be used for staking, that means that at some point in the future there will be 0 NMR. As the supply of NMR approaches 0, does that mean the value of NMR approaches infinity?

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The value of NMR might also be tied to its price volatility. The higher the (downside) volatility the lower the value? IOW, being able to earn a 20% annual return on one’s NMR is not worth much if that return can easily be offset (and more) by price fluctuations.

Also, while price and value are different, I think they’re related. So ‘value’ might also be tied to market liquidity. Without a consistently liquid market for NMR, how can we be assured that it is priced fairly? Illiquid products can easily be over-valued or under-valued, and with crypto in general I find it very difficult to distinguish which one it might be.