Data and Prediction Markets on Erasure Protocol

Numerai pushes its DeFi envelope with the Erasure Protocol, which lets anyone publish financial data and express their belief in its accuracy by having some “skin in the game.”

Numerai Is Expanding its Total Addressable Market

During its first few years, Numerai focused on establishing a method of predicting the behavior of financial markets via stock prediction tournaments — seeking to offer a collaborative and accurate approach to crowdsourcing stock market predictions. However, over time the company realized that the methodologies Numerai developed could also be applied to a broader range of real-world applications, since at its core their stock prediction tournament was a data market. To expand its platform, Numerai created the Erasure Protocol: a blockchain protocol operating on the Ethereum Mainnet, allowing anyone to publish data while staking and earning capital based on the accuracy of that information.

Core Tenets of the Erasure Protocol

Numerai’s Erasure Protocol incentivizes users to post high-quality information by creating a system where users have a financial stake in the accuracy of the information they provide. The company established a deposit-based system in which people can only offer information if they’re confident and willing to incur a financial risk based on the accuracy of the information. As a result, Numerai is able to trust the information provided by users in its data markets and prediction tournaments, which in turn enables them to provide high rewards to top performers. 

In order for these staking transactions to take place within its prediction tournaments and data markets, the Erasure Protocol relies on three key features which are applied to every application on Erasure:

  • Track-Record: The hash and timestamp of all data submitted to the Erasure Protocol is publicly recorded and accessible on Erasure’s blockchain ledger, which allows prospective data purchasers and other parties to evaluate the credibility of a contributor’s past performance when deciding whether to trust their forward-looking predictive models. By maintaining a permanent and immutable track record on the blockchain, Numerai is essentially creating a type of “credit score” which evaluates a contributor’s historical performance in any of Numerai’s prediction tournaments or data markets. 

  • Payments: Every application built on the Erasure Protocol has a payment feature underpinned by Numerai’s native ERC-20 token, Numeraire (NMR). Erasure’s escrow-enabling smart contracts also allow users to apply and exchange any Ethereum-based cryptocurrency on Erasure. These escrows are registered in the Erasure Escrow registry, which serves as a source of truth for the platform.

  • Recourse: Every market requires a coordination mechanism, which establishes and executes the rules of engagement and allows for arbitration in the event of a breach of contract. The Erasure Protocol embeds its market rules in its smart contracts, reducing contractual ambiguities and protecting market participants. 

Recourse on the Erasure Protocol comes in the form of a penalty imposed when a party breaches a contract. Within the Erasure Protocol, recourse is enabled through what’s called a “griefing agreement” — in which both parties confirm “griefing ratio” and amount of NMR at stake. The griefing ratio is the cost in NMR tokens that one party agrees to pay to impose the punishment of burning, or erasing, one NMR token owned by the counterparty. For example, a grief ratio of 1:10 means that it would cost the data buyer 1 NMR to burn 10 NMR of the data seller’s staked funds if the griefing agreement is activated. The data buyer is seeking to obtain information from the Numerai platform, with the data seller providing the information. Within Numerai, data sellers often propose varying grief ratios to express their confidence in the quality and accuracy of their information, with a confident seller proposing a steep ratio such as 1:20, and a risk-averse data seller refusing to sign a contract with a buyer unless it contains a ratio closer to 1:1. Every contract on the Erasure Protocol contains a grief ratio, and stipulates a timeframe in which griefing can be triggered. 

Griefing avoids reliance on a centralized oracle or a third-party arbitrator and instead allows contractually associated parties to reach a resolution on their own. And due to Erasure’s use of the Ethereum Mainnet, as new techniques for resolution like decentralized oracles are built on Ethereum they can be added to Erasure’s range of possible contractual term options.

The creation of the Erasure Protocol required a complete overhaul and expansion of NMR. When NMR was first created, it was a centralized token used only to reward stock prediction tournament winners, and therefore had no governance rights or other open-ended use cases. However, upon the establishment of the Erasure Protocol, Numerai reduced the total supply of NMR from 21 million to 11 million, eliminated the network’s ability to mint new NMR tokens, and turning NMR into the Erasure Protocol’s controlling token — a substantial step towards decentralizing their data ecosystem. As a result, anyone can now use NMR to build any prediction competition or data market on the Erasure Protocol.

Additionally, Numerai provides NMR-denominated bounties for users who complete certain tasks which help develop the Erasure ecosystem, such as discovering security exploits or opportunities to improve the protocol. As new decentralized applications (dApps) are introduced to the Erasure Protocol by anyone who decides to build on it, new bounties and opportunities to earn NMR will be added. 

Erasure Protocol DApps

There are three dApps currently running on the Erasure Protocol, all of which rely on crowdsourced intelligence:

  • Numerai Stock Prediction Tournament: Numerai’s original data market came in the form of a stock prediction competition, which initially ran on a centralized server but was migrated to the Erasure Protocol in 2019. The tournament incentivizes contributors to submit stock market prediction models, and Numerai rewards top performers with NMR while using user’s predictions to create the company’s own in-house stock market meta model.

  • Erasure Bay: Launched in March 2020, Erasure Bay is an open information marketplace for sourcing any kind of information, and allows anyone to request information which has been staked with NMR. Since there are little to no restrictions on the kinds of data feeds users can submit, Erasure Bay is an example of the flexibility of the Erasure Protocol to serve use cases beyond crowdsourcing predictions and tournaments, e.g. from sports betting tips and weather forecasts to whistleblower documents.

  • Numerai Signals: Released in October 2020, Numerai Signals is a financial market prediction competition similar to Numerai’s original stock prediction tournament. Its notable difference is that data contributors are able to submit market signals based on any data sources — not the encrypted data sets that Numerai provides. By enabling contributors to train their predictive models on any data set, Numerai helps contributors to tap into their personal expertise and be rewarded in NMR (through the same processes detailed above) for their proprietary knowledge — not just in finance, but in numerous other areas. 

Numerai believes that people are willing to place a financial stake on information they are most confident in, as long as the underlying models that generate their predictive signals cannot be reverse-engineered or stolen by data purchasers. For example, it is cost-prohibitive and potentially inefficient for individuals with valuable proprietary knowledge to form their own investment company and trade with their own signals, and Numerai’s system can bridge that gap. 

There are a multitude of potential benefits for data contributors participating in Numerai’s evolving information market ecosystem. Through the Erasure Protocol, Numerai is able to improve its performance as a hedge fund while also creating a reliable, transparent way for data sellers and third-party data purchasers to exchange valuable information on their own terms. Beyond the use cases for Erasure that exist today, being able to trust the quality of information from strangers will enable new ways of interacting with others that we can’t even imagine yet. 

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